TORONTO – Element Financial Corp. is splitting itself in two, moving executives say will help it boost the worth of its core fleet-management business while meeting investor demands to have an expanded group of funds.
When the separation is finished, Element shareholders will own stakes in two separate publicly traded companies – Element Fleet Management, with $19.5 billion in fleet and rail assets, and Element Commercial Asset Management, with $7-billion worth of equipment, rail and aviation financing.
Brad Nullmeyer, current president of Element, will run the fleet business, while CEO Steve Hudson will run the asset management business.
Tuesday’s announcement follows a four-month strategic review that was initially focused on the best way to realize the need for Element’s growing fleet business, which leases and manages vehicles for customers which range from Tim Hortons to DuPont.
At the time, Toronto-based Element said it was putting its Canadian commercial and vendor finance business on the market having a plan to use any proceeds to expand the fleet business.
However, Element CEO Steve Hudson said the company’s institutional investors didn’t like this idea.
“Strategic investors, upon the announcement in October, requested that we create more investment-grade yielding funds, not less,” Hudson said on a business call Tuesday.
“This request, along with unprecedented possibilities to acquire yield assets at or below book value have led us to accelerate the transition in our commercial finance business to an asset manager business having a strong investment-grade balance sheet.”
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In addition, Hudson said the split will resolve the “substantial undervaluation” of the fleet business.
“You look to comps of standalone fleet businesses and they’re substantially higher than those currently enjoyed by Element,” he said.
“It’s our strong belief that the cost of capital, the leverage on standalone fleet as well as asset management will drive towards higher valuations for that two businesses.”
Kroll Bond Rating Agency said the separation is going to be credit positive for Element Fleet Management, which is the earth’s largest publicly owned fleet-management business after the split.
“The company’s core fleet management and rail businesses have a relatively lower risk profile than the combined current company, with stronger credit metrics overall,” said Kroll, which currently rates Element’s debt BBB+.
Earlier Tuesday, Hudson said he hopes the split will generate the fleet business an A rating.
The agency added that the split will “aid in disentangling management’s attention on separate enterprises and could sharpen its concentrate on the core segments, fleet and rail.”
This should allow the company to increase leverage, said National Bank analyst Shubha Khan.
“As an effect, Element can liberate excess capital, and potentially increase operating earnings, and eventually drive higher valuations,” Khan wrote in a note to clients, adding that he believes as much as $2.2 billion in capital might be freed up.
In January, Element asserted growing its fleet-management business is its top priority, and Nullmeyer said the split will allow it to complete acquisitions without tapping the equity market.
“Should those opportunities arise, we’ll discuss them,” he explained.
Element will provide further information on the separation once it has figured out the best method of doing it, the company said. It hopes the split is going to be completed on a tax-free basis before the end of 2016.
Element’s shares jumped around 10 per cent Tuesday before closing at $13.28, up 6.33 percent.