TORONTO – Element Financial Corp. is splitting itself in 2, moving executives say can help it raise 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 2 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 which was initially centered on how best to realize the need for Element’s growing fleet business, which leases and manages vehicles for purchasers which range from Tim Hortons to DuPont.
At time, Toronto-based Element said hello was putting its Canadian commercial and vendor finance business on the market having a intend to use any proceeds to expand the fleet business.
However, Element CEO Steve Hudson said the company’s institutional investors didn’t like that 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, together with unprecedented possibilities to acquire yield assets at or below book value have led us to accelerate the transition in our commercial finance business for an asset manager business with a strong investment-grade balance sheet.”
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In addition, Hudson said the split will resolve the “substantial undervaluation” from the fleet business.
“You turn to comps of standalone fleet businesses and they are substantially higher than those currently enjoyed by Element,” he explained.
“It’s our strong thought that the cost of capital, the leverage on standalone fleet in addition to asset management will drive towards higher valuations for the two businesses.”
Kroll Bond Rating Agency said the separation will be credit positive for Element Fleet Management, which will be the earth’s largest publicly owned fleet-management business following 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 earn the fleet business a b rating.
The agency added 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 permit the company to improve leverage, said National Bank analyst Shubha Khan.
“As a result, Element can liberate excess capital, and potentially increase operating earnings, and eventually drive higher valuations,” Khan wrote in a note to clients, adding he believes around $2.2 billion in capital could be freed up.
In January, Element said that growing its fleet-management clients are 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 determined the best method of doing it, the company said. It hopes the split will be completed on a tax-free basis before the end of 2016.
Element’s shares jumped around 10 % Tuesday before closing at $13.28, up 6.33 percent.