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| Guy Ramsey |
September 8, 2005 • My stockbroker's philosophy is to buy on bad news. So if I adhere to this advice, I ought to be buying a whole bunch of United Rentals' stock. (Note to self: Oh yeah, I already tried that on the company's first round of bad news.)
Whether you are a stockholder or industry observer, it seems everyone is trying to muddle through the quagmire that keeps getting deeper at United Rentals. Here's the latest. URI recently fired its president and chief financial officer John Milne for his refusal to answer questions about a Securities and Exchange Commission (SEC) probe. Leading the list of speculated reasons for the investigation is URI's method for booking assets in the late 1990s during the company's consolidation of the rental industry. United Rentals claims that Milne has failed to fully cooperate with the SEC in its ongoing probe.
After Milne was put on notice to rectify the situation, a spokesman for Milne said his lawyers advised him it would be careless of him to meet with a special committee of the board of directors to discuss matters that occurred several years ago. This committee was investigating accounting issues that related to the SEC inquiry.
Milne will forfeit unvested stock options, and the company said it would repurchase 507,251 shares of common stock and warrants from Milne for $7.1 million. In addition, he will not receive a severance package. Milne's spokesman declared that the events did not warrant termination “with cause.” If nothing else, a wrongful termination case may be in the cards.
Before the dust settled from all of this, URI announced it is soliciting consents for amendments to indentures covering its bonds and securities, offering some substantial cash incentives and penalties to the lenders if they failed to meet their own deadline. This move is to allow the company additional time (until March 31, 2006) to make certain filings and regain compliance with the SEC. In a Form 8-K, United Rentals added that, if it's unable to make the amendments and subsequently unable to refinance its debt, it may be "forced to restructure our obligations or seek protection under applicable bankruptcy laws, or an involuntary bankruptcy proceeding may be brought against us." Now there's a term everybody understands.
URI's creditors didn't take long to posture themselves. An ad hoc committee of note holders, whose members are financial institutions that collectively hold an aggregate of more than $800 million of the three issues of United Rentals' publicly held senior and senior subordinated notes, announced that it has organized in order to negotiate the terms of the consent solicitation proposal. The three note issuances are $1 billion, $525 million, and $375 million. Collectively, the committee holds substantially more than 25 percent of the total liability, which is the amount necessary for note holders to give notice of an event of default to the company under the indentures. It appears URI is hinting at bankruptcy to provide a further incentive to the bondholders, and everyone else mentioned in its request, to accept the payment in exchange for the delay in reporting the financials. Obviously, if the creditors were to actually put URI in default of these notes, few companies could handle that kind of cash requirement.
Meanwhile, the market did not initially react as badly as one would expect. URI stock initially rose in value — I guess I'm not the only one that buys on bad news — but after a week it drifted lower. Talk about buying on bad news. Katrina has since weighed in on the whole matter, pushing the stock to recent highs. This is undoubtedly largely due to the fact that buyers perceive that URI, and like concerns, will reap the benefits from the unprecedented rebuilding that must take place.
Responding to URI's saber rattling statement, the ad hoc committee stated it is interested in pursuing a constructive dialog for the benefit of all concerned, but that the terms of the consent solicitation as presently proposed are inadequate. In addition to improved financial terms, the committee will also insist upon enhanced monthly reporting of un-audited interim financial information until the company completes its financial restatement.
Until the issues are resolved, the investigation will continue to cloud the stock market's view of the company. On the surface, there seems to be a great deal to be concerned with. However, if you believe the numbers — which I do — you see sales increasing and margins growing. With utilization high and rates improving coast to coast, there are few markets where URI isn't sharing in the robust times we're all enjoying. URI is an atypical Wall Street concern. Because of the nature of its business, it's one of few companies that can have no net worth and still spin off a ton of cash • in the order of hundreds of millions each year.
Because cash will always be king, it's hard to believe that the creditors will put URI in a position to jeopardize the security of their notes and the cash such assets are producing. URI certainly has its hands full in Greenwich, Conn. But as long as the battle is kept there — and out of the day-to-day operations of the business — they'll do just fine.
