Equipment financer Element Financial Corp to split into two companies

TORONTO – Element Financial Corp. is splitting itself in 2, moving executives say can help it boost the value of its core fleet-management business while meeting investor demands to have an expanded family of funds.

When the separation is finished, Element shareholders will own stakes in 2 separate publicly owned 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 focused on how best to realize the value of Element’s growing fleet business, which leases and manages vehicles for purchasers which range from Tim Hortons to DuPont.

At the time, Toronto-based Element said hello was putting its Canadian commercial and vendor finance business on the market having a plan to use any proceeds to grow 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 people create more investment-grade yielding funds, not less,” Hudson said on a conference call Tuesday.

“This request, along with unprecedented opportunities 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 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 turn to comps of standalone fleet businesses and they are substantially greater than those currently enjoyed by Element,” he said.

“It’s our strong thought that the price 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 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 possess 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 a b rating.

The agency added that the split will “aid in disentangling management’s attention on separate enterprises and may sharpen its focus on the core segments, fleet and rail.”

This should allow the company to improve leverage, said National Bank analyst Shubha Khan.

“As an effect, Element will be able to liberate excess capital, and potentially increase operating earnings, and ultimately drive higher valuations,” Khan wrote in a note to clients, adding he believes as much as $2.2 billion in capital might be freed up.

In January, Element said that growing its fleet-management clients are its main concern, and Nullmeyer said the split allows it to do acquisitions without tapping the equity market.

“Should those opportunities arise, we’ll discuss them,” he said.

Element will provide further information on the separation once it’s determined the best way to do 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 as much as 10 per cent Tuesday before closing at $13.28, up 6.33 percent.