[00:00:00] Speaker A: I'd really think of these equipment rental companies as a dominant channel to market for industries like construction, mining, oil and gas.
[00:00:14] Speaker B: I am Reece Tisdal and this is the future of water which we talk about. All the ways which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 114. Holy cow, have we done a lot of these. And I can already tell you it's going to be another great one. That is because today I'm joined by Ethan Edwards, senior analyst at Bluefield Research. He and I are going to take a deep dive into the water landscape as we do and this time we're going to talk a little bit about the equipment rental sector. Hold on. I know it may not sound like the sexiest topic out there, but Ethan has just put together some interesting analysis of equipment rental companies, recent M and A and market positioning of companies like Herc, Sunbelt and United Rentals. If you hadn't seen their equipment out on the streets, at least in the US and the trucks running about, you might now because they are everywhere, including the water sector. So really what I like about Ethan's analysis is that it not only highlights a changing competitive landscape among a unique group of companies such as this, it also showcases another customer facing group of organizations or companies that are looking to wield greater influence. And that's being demonstrated through their company strategies that Ethan talks a bit about. So we'll bring Ethan on in a little bit to highlight some of his analysis and hopefully you'll stick with me and learn a little bit about it. But before we do that, you're gonna have to bear with me just a little bit and let me talk about what's caught my attention recently. So I got two items, they're both notable. I'm going to share them with you. So let's go across the pond real quickly, talk a little bit about the ongoing saga of Tim's Water. So Hong Kong, CK Infrastructure, they submitted a preliminary 7 billion pound bid for a majority stake in Thames Water. It's contingent on a number of different write downs by utility bondholders, but it also just puts the eye spotlight on the private water sector in the UK and Tim's Water, which serves I think about 17 million people, mainly in the London area.
So it's not only a big utility in the UK, it's also large, globally speaking. So with nearly £20 billion of debt, Tim's Water does face insolvency risks and it's seeking billions in new equity. So CK Infrastructure's bid really highlights the challenges of securing fresh investment while also restructuring its balance sheet and potentially clashing with senior bondholders like Elliott Management, who it's my understanding they may be preparing a bid or competing bid as well. But competition concerns are also on the rise in this case because CK Infrastructure also holds a majority ownership stake in Northumbrian Water, another utility in the uk. And for those who don't know this, the UK market, it's the most privatized market for water utilities in the world. It's a handful of utilities, but investors own all of them.
Other bidders for Tim's Water include firms private equity firm like KKR, which also submitted, I believe, a 4 billion pound bid into the utility. And it sounds like Tim's Water has already secured at least high court approval for a 3 billion pound loan. But as they do, legal challenges persist in this case. So why do we care about this? Well, I'd say a couple things. One, I just got out of a meeting this past week with an investor in utility in the US and actually the topic of Tim's Water did come up. They were asking about it and what it might mean. And I think the way I see it is even in the us, if not in other parts of the world, the, the failure or failings of some of these private utilities, particularly large ones such as Tim's Water, do create a perception problem about the role of private participation in water. It's a bit of a black mark and it just arms the opposition with ammo to push back about why private, private companies should not be involved in the water sector. And you know, our take at Bluefield is that it's going to take a portfolio approach. People do complain about water, they don't seem to have a problem about the power sector. I'm not trying to, you know, come up with moral equivalents here, but I'm just being realistic as well. So the water sector is held to a different standard than other critical infrastructure, fairly or unfairly. So that's worth taking a look at. Second point is that this bid underscores really the financial instability of Tim's Water, which is a major water utility in the uk. But it also raises concerns about the viability of highly leveraged firms such as this, whether it be in the UK or elsewhere. And then I think, you know, another point that's worth bringing up is that there is there the presence of multiple bidders, including kkr, which signals interest in distressed water assets, but also raises questions about valuation, governance and the long term financial stability of water utilities in the uk. So that's my one item that came to mind. But just as I was coming in to record this, I wanted to bring up that the US Supreme Court seems to have weakened the EPA's rules on raw sewage discharges and the water supplies in a 5, 4 ruling that it's what seems like it's curtailing the EPA's authority under the 1972 Clean Water Act. That's right. I said 1972. That's how long it's been. The decision by SCOTUS or the Supreme Court prevents the EPA from using broad narrative based water quality standards and discharge permits. So now what does that mean? Instead, it's going to require specific pollution limits. So this is the case with San Francisco versus the epa. San Francisco, which challenged its wastewater permit, argued that the EPA lacked statutory authority to hold it responsible for overall water quality. So it's essentially saying, hey, you cannot hold the city of San Francisco or the utility, wastewater utility responsible for the water quality of San Francisco Bay. There are a lot of dischargers into the bay and therefore the utility needs specific requirements. It can't be so broad. The ruling is seemingly a win for industry groups, including the National Mining association, which was also affiliated with San Francisco in this case, as well as the US Chamber of Commerce. And it quite honestly, it follows the court's recent decision to eliminate Chevron deference, further eliminating regulatory oversight of the EPA and other agencies. It's not just the epa. The dissent was led by Justice Amy Coney. Barrett argued that the ruling undermines the Clean Water Act's intent to protect water bodies from pollution. This is an unfolding story. We're just getting news of this. Quite honestly, we at Bluefield anticipated this to be released because it is a fairly large decision.
But maybe the bidding has already been done through Chevron deference. We thought it was going to be closer to June when it was going to be the ruling was going to be announced or made. So there we go, a little bit of news and two topics that caught my eye this week and even today. So that being said, let's get to it and talk to Ethan Edwards about equipment rental companies in the US and what's happening there.
All right, so I'm joined here by Ethan Edwards. Ethan, how's it going?
[00:07:57] Speaker A: It's good. How are you, Rhys?
[00:07:58] Speaker B: I'm pretty good. Pretty good.
You know, it's on the road, but actually this afternoon, but otherwise things are going along swimmingly. So one of the things I wanted to bring you on is you've done some recent analysis on the rental Equipment market. We haven't done this in the past. We've seen a number of these companies that you've talked about, but you've taken a look at their strategies and what some of these companies are doing, including M and A. And I quite honestly, I thought it was super interesting.
So the analysis really is the hook, as we call it, really began with some analysis of an M and A deal. HERC rentals made a 5.3 billion dollar acquisition of H and E Equipment Services. And so for me, it's like, all right, what does that mean? But let's give their listeners a little bit of a background on the deal. Who are HERC and H and E? What do they do? What's a role in the water sector? Why? Why is this interesting to us? Because I think, you know, as we talk through it, maybe the opportunity and why we think it's interesting will unfold. So why don't you give it a shot?
[00:09:05] Speaker A: Yeah, so I'll start with the companies. Who are they? What do they do? Herc rentals, H& E Equipment Services. They're large equipment rental companies. They run out a whole variety of heavy equipment. I'd say things like big cranes, earth moving equipment, generators, that kind of stuff is what they deal with day in, day out. And they have similar business models to car rental companies. So similarly, they manage a fleet of equipment, maintain it, rent it out, end up selling that used equipment down the line. And in fact, HERC Rentals itself, unsurprisingly, potentially used to be part of the car rental company Hertz until it was spun off in 2016.
So recently, last month, February 18th, to be exact, Herc Reynolds announced it had outbid its rival United Rentals, to acquire this fourth biggest equipment rental company, H and E Equipment Services. So they're acquiring them for $5.3 billion, outbidding United Rentals, $4.8 billion. And the combined companies of Herc and H&E together will have over 600 rental locations, an equipment fleet valued over $10 billion, combined market share of around 6% in the equipment rental sector in the U.S. and that really cements them in the third spot behind United Rentals and Sunbelt Rentals. So that's broad equipment rentals. Thinking about water specifically, they also rent out some equipment that's very important to the water sector. They run out pumps, integrated dewatering systems, trench safety equipment, a whole host of things. And because of that, there are also key sales channels, channels to market for equipment manufacturers.
[00:10:52] Speaker B: Yeah, it's super interesting. I mean, we've all done it. You drive through the streets and you see these brands, whether it be United Rentals, Sun Belt, Herc, you don't even realize, maybe not even realize what they do. And obviously since we're in the water space, they do have a real impact. And I think that's why it really has caught my eye. So given the deal and what else, you know, including the fun fact that Herc used to be part of Hertz, who knew that? I didn't know that. What does it mean for the water sector? You talked a little bit about the sales channel for oem. So can we expand on that and what it really might mean beyond that?
[00:11:29] Speaker A: Yeah, definitely. So we know hardware and equipment manufacturers rely to a certain degree on these rental firms to distribute pumps, other solutions. So I'd say there are kind of three takeaways, three things to keep in mind here for the water sector. So I'll start one. I mean, this equipment rental space, the equipment rental trend that's growing. So construction equipment, whether it's rented or owned, really, that's a big part of project costs. And there's been, you know, there are numbers out there. The American Rental association, they estimate that over 50% of construction sites rely on rental equipment to help save on ownership costs, project costs, and that percentage, that reliance on rental, that's been ticking up over the past 20 years or so. And you know, thinking about that rental versus ownership, especially for this kind of business, it makes sense at a high level. There's a focus on efficiency. It's hard to, you know, right size a fleet of equipment for a whole variety of projects. There's constant maintenance upkeep, technology is improving. You want the newest technology.
I mean, we've even kind of seen it in the municipal utility sector to a certain extent of just shifting from capex costs to opex. So as everything it seems shifts to subscription to rentals, shifts towards being asset light, the rental companies are themselves more important, especially when we think about end markets and industries like mining, construction, oil and gas. Sectors that have really historically relied a lot on rentable mobile equipment. Second, beyond just running equipment, these rental firms themselves have essentially done intentional shifts towards being full solution, full service providers. So they don't just want to rent pumps and equipment. They really want to help design and configure a total solution. So take for example a construction job site, a big construction project. They need to excavate a foundation which fills with water that needs to be dewatered. These rental companies like Herc, H and E United Rentals they don't want to just do a one time pump rental. They want to help a bit on the engineering side too. They want to size the pumps, the hoses, the pipes, any other support equipment that's really needed to dewater that site. So them shifting towards being more full scale solutions service providers, that puts them in more direct competition with some of the more specialized turnkey water service providers that we cover and broad engineering design firms too. So the last takeaway, the third takeaway, I'd say, you know, these companies at the top, United, Sunbelt and especially Herc with this recent kind of landmark HNE services deal, they've really been aggressively expanding through M and A, consolidating the space. So it seems to me that it's becoming a top heavy concentrated channel to market.
[00:14:41] Speaker B: Yeah, and I think what else is all, I mean, I think, and I don't think you mentioned this, but I'll just reinforce it is, I mean these are not small companies, right. I think we're talking at least at a top line. United is what, over a $10 billion company. Sunbelt is also over 10 as well, if not 11. And then Herc is what, 3.6 plus H and E. So they're looking at about 4.75, almost $5 billion in annual revenues. So they're not insignificant. I really like the point that you made about the, you know, this is a conversation that I've also had with you. Utilities and engineering firms is like any way to shift, you know, the spend over to OPEX. 1. OPEX budgets are more likely to be approved because it's ongoing operations. So the OPEX budget, as we've seen in the, at least in the muni data, has swelled a bit over time, according to Congressional Budget Office. And then for municipal utilities, OPEX represents about, is it 65% of total spend? A little less than that. So it swelled over time and maybe partly because of this, but also it also reduces risk. Right. When things get tight, if you don't have to take on the whole deal with capital investments, then you can just rely on these companies.
Super interesting. And then the next question I will have for you is how does this deal reshape the competitive landscape for the rental companies? So you, you mentioned HERC in the third spot. So let's talk a little bit about, you know, the other two, United and Sunbelt, and then we can get into sort of how they're affiliated with pump companies and such.
[00:16:28] Speaker A: Yeah, I mean I'd say all three of those companies mentioned, they really pride themselves on being consolidators. So even before this H and E acquisition, I mean HERC itself had increased its locations 50% over the last seven, eight years or so, just largely through M and A. And then thinking about their two main competitors, United Rentals, Sunbelt Rentals, they've been on the same path, building out through M and A. So United Rentals estimated 15% market share in the U.S. they've really built up their pump and dewatering capabilities through a string of deals over the last 10, 11 years. They acquired National Pump in 2014. I mean, I think that was over a $700 million deal. Baker Corp. In 2018. And they acquired Thompson Pump's rental business in 2019.
Sunbelt, they have an estimated 11% market share in the U.S. they've used acquisitions to do things like expand their pump services into Canada. And so the rental business as a whole, it's very local. You know, moving equipment around is expensive. So the scale matters, the number of rental locations matter really whether it's built through M and A or organically. And so yeah, I think we're seeing all three at the top have increasingly strong brand recognition. And they do things like they buy pumps from manufacturers, you know, whether it's a company like Franklin Electric, Renfos Solzer, they buy these pumps from OEMs and then they integrate them into their own self labeled mobile pumping, mobile treatment units. And so that brand recognition, like you said, it's increasingly strong. I mean feels to me it's one of those things like bird watching where, you know, once you start looking out for them, they're everywhere. I mean probably one long run around Boston you could spot all three, I'd say. So as they get bigger, the brand recognition, it's only gonna grow.
[00:18:29] Speaker B: Yeah, that's a nice way to put it. I mean I used to think the same thing about Ferguson and Corn Maine. I used to, quite honestly before founding Bluefield Research mentally wasn't really thinking a lot about that. I guess it was HD Supply at the time for Cormain, but didn't really notice them. Now I see those trucks everywhere I go. I see the brick and mortar buildings For Ferguson, I see all of that. I was, not long ago, I think I mentioned on the podcast, I had an H VAC problem at my house last year and I had to just go find a part and I was going to fix it myself. And I went into the, to the supplier and noticed all the, that Grundfos they had up and, or they had all the, all the kit and the labels there. So it is bird watching is a good way to put it. All right, so you mentioned a couple of pump companies, I think Franklin Electric or Grundfos Solzer, these equipment companies. Surumi is another one I think that you talk about in the research that you put together. What might this mean for them? Because it seems like is there a competitive conflict or is there potential friction here over time that might be emerging?
[00:19:37] Speaker A: Yeah, I mean I think one key takeaway is that the rental companies are just, they're an increasingly important channel to market. So these pump manufacturers, specifically for really the end markets of mining, construction, oil and gas, are going to be increasingly dependent and reliant on them for distribution of their own products. And so as the rental companies continue to expand and build out their own branded product lines, I mean there's going to be more pressure on pump companies to differentiate themselves. Whether it's through technology, reliability, any of those important factors that you know, would be top of mind. And another interesting thing that we've seen is that there have been a few exclusive supply agreements and co branded deals, things like that. So for example, Thompson Pump, they announced an agreement last year in 2024 with Wagner Rentals, which is part of Caterpillar Rentals, I believe. And so that's an agreement to exclusively rent out Thompson pumps in three states in the Rocky Mountain region. So it'll be interesting to see because I mean those agreements are exclusive, they help almost secure steady demand, guarantee some use for those dewatering pumps for the manufacturers. It'll be interesting to see how those agreements evolve over time. And then I'd also, you know, I'd also call out Xylem here. So unlike some of those pump peers that we mentioned, Xylem runs its own global pumps rental business in house. So that can expose it to higher margins, potentially more higher end market volatility if construction is up or down, can give it more direct relationships with its own end users. So pros and cons there. But that does place Xylem. They're in direct competition with these big equipment rental firms. So change in the equipment rental for market is also important to them.
[00:21:32] Speaker B: So I think that's maybe that's a good segue to my last question and that is the question about how do vendors and OEMs navigate the different channels to market. I think your point is like you said about Xylem, if they have a rental business, they just have closer contact with the customer potentially or end user. So there is a benefit to that. So where do the rental companies Fit into this sort of channel strategy landscape, if you will.
[00:21:58] Speaker A: Yeah, I mean that channel landscape strategy, that's fascinating. I mean we know the equipment manufacturers rely on a whole host of different ones to get their products to market. You know, our market research and through this podcast we've covered the importance of a bunch of them. It seems like we've covered engineering firms, the system designers, the distributors like Corn Main and Ferguson direct sales to end users evenly where they're doing it themselves. And now we're kind of highlighting these equipment rental companies. So they're all important, they all provide kind of a local touch point for an end customer. And so I'd really think of these equipment rental companies as a dominant channel to market for industries like construction, mining, oil and gas. And then thinking about the landscape from high level, you know, one thing I'd call out here is that rental companies aren't just directly competing with each other, they're competing with these other channels to market and traditional self ownership model, if you will. So that kind of includes the dealers, distributors, equipment companies selling products directly to end users themselves. It's kind of a battle of preference between ownership versus renting. So that's one thing I call out. Another thing I'm watching would be, you know, how did digital and AI solutions play in here and how do they roll out across the market as potential differentiators? So there's clear opportunities, I'd say, in having big construction, big industrial sites, you know, using data to do more, do more effectively. Whether it's a connected work site, environmental monitoring on the water side, tracking assets, worker safety, there's a lot of potential there. So lots of stuff is happening and clearly the space is evolving, so more to come on it hopefully.
[00:23:59] Speaker B: Yeah, I think this is super helpful. I think it's, you know, like you said and it's not a surprise. Right. I think what ends up happening is, you know, there are these companies, I mean it happened in the distribution analysis we did of Corn, Maine and Ferguson and Vesco and those where traditionally they're hardware and equipment suppliers and they've got access to the customers. And now you can tell, and I think I've even said it on this podcast or somewhere else in that, you know, you can look at their websites and tell they're offering more than that. Now they're offering aftermarket solutions and services whether they are approved service providers by the OEMs or not. You know, that's don't have all the details on that and maybe it varies, but they are encroaching into that space. And so people are coming at it from different angles, like you said, across the different sales channels, trying to capture more higher margins, longer term revenues and sales. So I think that's super interesting. And that's like I said, I really like this research put together actually in pretty quick fashion. So with that being said, I will let you go. But my last question is, what are you working on now? Is there anything happening that at least in your world that the listeners should know about?
[00:25:14] Speaker A: There's always lots of exciting stuff happening behind the scenes, but I think the one thing I call out this time is we're doing more concerted push to look at the irrigation end market. So hopefully, you know, we'll have similar analysis on this type of, you know, channels to market to the farmers essentially. So that's hopefully to come in the coming months.
[00:25:36] Speaker B: Yeah, I mean, speaking of pump companies, you know, I think that's a good, good example. I know we have a number of pump clients that are trying to figure out that landscape as well, among a lot of other things. But yeah, I look forward to that and I'm sure everybody else will as well. When we wrap that up, we'll get you back on the podcast, if not beforehand. So. All right, Ethan, well, thanks a million for jumping on and thanks for the research and we'll talk again soon.
[00:26:04] Speaker A: Sounds great. Have a good one.
[00:26:05] Speaker B: Take care.
All right, that's a wrap for our 114th episode. So thanks to you for being part of the journey in 2025. Before we sign off, if you're in Boston, Barcelona, California, Chicago, New York.
Am I forgetting anywhere, Paris, anywhere else. We'd enjoy the opportunity for a meeting. You can always reach out to us and set it up. We like to meet in person. Send us a note@water expertsluefieldresearch.com with any topic ideas you'd like us to discuss. As I always say, we're doing this for you because we think it's interesting. Lastly, tell a friend about it. I like friends. I have friends and I, I've already shared the Future of Water podcast with them, so I only ask that you try to do the same. This podcast and these water industry insights have been brought to you by the one and only Bluefield Research. To learn more about us, Visit
[email protected] Till we talk again. Be well, be safe and take care.
