Investing.com -- On February 19, 2025, Herc Holdings (NYSE: HRI ) Inc. announced a definitive agreement to acquire H&E Equipment Services (NASDAQ: HEES ) Inc., a U.S.-based equipment rental company, for $5.5 billion. This move is expected to accelerate Herc’s growth strategy in the North American equipment rental market. However, S&P Global has revised its outlook on Herc Holdings and its subsidiary, Herc Rentals Inc., to negative from stable due to the expected increase in debt from the acquisition.

The purchase price for H&E Equipment Services, calculated at $104.89 per share, is expected to be funded with approximately $4.5 billion in debt and $1 billion in common stock issuance. This substantial debt is likely to increase Herc’s leverage by about a turn, leading to the negative outlook.

S&P Global also placed the 'BB-' issue-level rating on Herc’s $2 billion senior unsecured notes ($1.2 billion and $800 million tranches) on CreditWatch with negative implications. This indicates a potential lowering of ratings on Herc’s debt post-acquisition, depending on the final mix of debt.

The acquisition of H&E is expected to expand Herc’s branch network and its fleet of general rental equipment, enhancing its overall scale. The combined entity is projected to generate close to $5.4 billion in revenues and over $2.3 billion in S&P Global Ratings-adjusted EBITDA in 2025 on a pro forma basis. However, the costs of integrating H&E could dilute potential savings in the first one or two years and pose a significant risk to operating performance.

The negative outlook reflects the potential strain on Herc’s credit metrics following the acquisition. If S&P Global forecasts that Herc's debt to EBITDA ratio will not improve below 4x within 12 months of closing, it may lower its rating. S&P Global could also lower the ratings if Herc’s leverage remains above 4x within a year of acquisition close due to higher than forecast costs associated with the integration of H&E, significant decline in end-market demand, loss of market share leading to profitability deterioration, or additional debt-funded acquisitions or aggressive shareholder returns.

On the other hand, the outlook could be revised to stable if Herc reduces leverage toward 3x, providing sufficient cushion to withstand earnings volatility through an economic cycle, and if Herc generates moderate free cash flow through the cycle.

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