Element Financial Corporation announced that following the completion of a strategic review of each of the Company’s business units that it initiated in October of last year, the Board of Directors has approved plans to proceed with a transaction that will result in the separation of the current business into two publicly traded companies - a $19.5 billion world class fleet management company (Element Fleet Management) to be led by Bradley Nullmeyer and a $7.0 billion North American commercial finance company (Element Commercial Asset Management) to be led by Steven Hudson. Mr. Hudson and Mr. Nullmeyer will continue building on their 30 year partnership as Mr. Nullmeyer will serve as vice chairman of Element Commercial Asset Management and Mr. Hudson will serve as vice chairman of Element Fleet Management.
“Following the completion of a comprehensive strategic review of our operations and corporate structure, we’ve concluded that Element is comprised of two very different businesses that will be more effective at maximizing performance for the benefit of shareholders, lenders, customers and employees if they are structured and capitalized as separate public companies,” said Steven Hudson, Element’s Chief Executive Officer. “On completion of the separation, Element shareholders will have an ownership interest in two exceptional businesses - the world’s largest publicly traded fleet management company and a high growth asset management business built on a broad commercial finance origination platform supported by global institutional investors,” added Mr. Hudson.
Proposed Business Structure
With approximately 2,600 employees, Element Fleet Management will continue to hold the leading market share of the North American fleet management industry and will include the Company’s current fleet management operations in the United States, Canada, Mexico, Australia and New Zealand as well as its global alliance with BNP-Arval. Its assets will include the Company’s current $17.5 billion portfolio of fleet assets as well as the current $2 billion portfolio of rail assets which will also provide additional pre-tax cash flow from this entity’s core fleet business. These rail assets will be managed by Element Commercial Asset Management. Approximately 80 percent of this entity’s combined $19.5 billion asset portfolio will be US-based.
With approximately 200 employees, Element Commercial Asset Management will include the Company’s current North American commercial and vendor finance business and the Company’s current aviation and rail asset management businesses. Its assets will include the Company’s current $3.3 billion portfolio of commercial finance assets as well as the Company’s current $2.2 billion portfolio of commercial aviation assets established in June of last year as Element Commercial Aircraft Funds (ECAF) which the Company currently manages on behalf of 30 institutional investors.
This proposed business structure accelerates the Company’s discussions with several strategic institutional investors with respect to structuring and participating in an expanded family of funds that will support the continued growth of this commercial finance business. Under this proposed business structure, Element Commercial Asset Management will continue with a strong investment grade balance sheet to support this family of funds.
The Company’s “on balance sheet” aviation finance business is being discontinued and the current $1.5 billion portfolio of fully-performing aviation assets will be transitioned to a future aviation fund, sold or managed to maturity.
Separation Benefits
Element’s current business structure combines operations that have different operating profiles, growth trajectories, leverage and capital requirements. These operations have now grown to become substantial businesses and their continued common ownership limits their ability to achieve their full potential. As separate companies, each of these businesses will be able to devote 100 percent of its resources on developing its core business and serving its customers without distraction from its core mission.
Element Fleet Management, as the world’s largest publicly-traded fleet management business, can generate higher returns as a stand-alone company with increased balance sheet ratings and higher leverage that more closely approximate those that apply to comparable fleet management businesses. This company will pursue organic growth opportunities and accelerate the deployment of new products and services that will continue to shift its revenue mix in favour of fee-based income. It will continue to benefit from the proven performance of Chesapeake Funding II as the optimal funding program for finance assets secured by fleet vehicles. Its equity investors will participate in the ownership of a stable, market leading franchise with organic growth potential, proven leadership, accelerating fee income and robust funding programs. Element Fleet Management's stable operating base, combined with strong operational cash flows, will support consolidating acquisition opportunities.
Element Commercial Asset Management, comprised of the already established commercial aviation fund together with the Company’s very successful North American commercial and vendor finance franchise and railcar business, will more easily complete its full transformation to a fee-based asset management business model. Through this transformation, it will deliver higher returns and enable the pursuit of organic and acquisition growth opportunities within its core verticals. Through this family of funds and its investment grade balance sheet, this company will be able to supply its institutional investors and funding partners with predictable access to a range of high-quality rated portfolios diversified by geography, asset, duration and yield. Its equity investors will participate in the ownership of a high cash flow, fee-based business with experienced leadership, efficient and stable funding sources and an industry-leading position in its core verticals.
Separation Process
The Company is currently analyzing the most efficient method to implement the separation of the two businesses and further details will be provided to the market as Element completes this analysis with its advisors. The separation transaction that will split the Company into these two publicly traded entities is expected to be completed on a tax free basis before the end of 2016. The allocation of the assets, liabilities and capital structure of the Company, as well as the structure of the Board and the deployment of current corporate services staff between the two new entities will be determined as the details of this separation transaction are determined.
The separation of the Company will be subject to customary approvals including the receipt of all required third party approvals and the final approval of Element’s Board. BMO Capital Markets, Barclays Capital and INFOR Financial are serving as financial advisors to the Company through the separation process.
Until the separation is complete, Element will continue to operate as a single company and it will continue to be “business as usual” for our employees, customers and suppliers. Through this process, the Company will maintain and continue its investment grade balance sheet, its proven funding facilities and $6 billion of forward, committed funding capacity.