Volvo Rents Construction Equipment
Volvo was busy last week. The company sold its equipment rental business, Volvo Rents, for slightly more than $1 billion, and purchased the articulated and rigid hauler business from Terex for about $160 million. What’s going on?
Volvo obviously no longer wanted to be in the rental business. It got there through a circuitous route. The company tried encouraging its dealers to enter the rental business but never succeeded. Dealers were focused on the larger Volvo products. I think there was one Volvo dealer that took on a rental franchise.
There was no lack of effort on Volvo's part. The company advertised Volvo Rents franchises in The Wall Street Journal’s classified ad section. The company offered huge incentives to interested parties including cash, training, and facilities planning.
But Volvo also wanted 4 percent of franchisees' total rental as well as pledge to buy everything through Volvo Rents operations for 15 years. Most people I spoke with that had rental industry experience thought the business plan was fraught with problems, not the least of which was the equipment rental business' notoriously thin margins. Paying that portion of revenues to Volvo could eat all of an operation's profit, especially in a downturn. And by making all fleet purchases through Volvo's purchasing department, a franchise owner couldn't shop around on their own for the best deals.
Volvo launched Volvo Rents in 2001 and has run it since then. There are 130 branches in the U.S., Canada and Puerto Rico, with about 2, 100 employees.
The company hasn't disclosed Volvo’s Rents' past business results so we don’t know if it was profitable throughout its history. However, when Volvo announced the sale they disclosed that Volvo Rents had revenues for the first nine months of 2013 of approximately $470 million and an operating loss of $7 million. Volvo Rents will generate nearly $625 million in 2013 revenues, if you annualize the revenues and assume their fourth quarter equals the other three. That’s a huge revenue jump from 2013 when Volvo Rents reported annual revenues of $333. If we assume that the 2013 EBITDA margin was 30% on $625 of revenues, then Platinum is paying about six times EBITDA.
Volvo spent the past two years buying franchises and converting locations to wholly owned Volvo Rents operations. The company also purchased a number of small rental companies to fill in geographic voids and make the business more attractive to buyers. Volvo Rents also put all the locations on a common computer platform.
The buyer, Beverly Hills, Calif.'s, Platinum Equity, is a sophisticated buyer of businesses and has a huge portfolio. In the equipment space the company owns Maxim Cranes, Keen Transport, Nesco a small rental company in Indiana, and in May of 2012 purchased 65 percent of Caterpillar Logistics. The Volvo Rents deal is expected to close by the end of the 2014 first quarter.
A number of equipment manufacturers have owned distribution and rental businesses. Problems always seem to arise when the manufacturers try to smooth out production and use the business as an inventory repository. I’m not saying that Volvo did that, but it is a common problem. Caterpillar owned and operated Carter Machinery its Virginia dealer for about 10 years. In the 1980s Case derived 60 to 70 percent of its construction equipment sales from a huge network of retail outlets. Komatsu, JCB and Deere have all dabbled in the dealer side of the business. Although it’s tempting to try to control the flow of products into customers’ hands, it is hard for a manufacturer to replicate the entrepreneurial spirit you get when someone has his or her personal money at stake. Obviously, Volvo came to the same conclusion.