Japan's Sumitomo invests in US rental business Sunstate Equipment

Japan's Sumitomo Corp has acquired a US$50 million investment in Sunstate Equipment Co, giving it a minority shareholding in the business. The funds will be used to strengthen Sunstate's balance sheet and capitalise on growth opportunities.

Sunstate, founded by company chairman Mike Watts in 1977, is based in Phoenix, Arizona and is one of the largest rental companies in North America. It has 52 rental locations in California, Nevada, Utah, Colorado, Arizona, New Mexico, Oklahoma and Texas, and reported rental revenues of €169 million in 2008, ranking it at number 51 in IRN's listing of the world's largest 100 equipment rental companies.

Sumitomo said it had been actively looking for an investment opportunity in the US rental market and had identified equipment rental as a strategic target for the future. "With the world's largest market of more than $30 billion and rental penetration rates that have continued to increase year after year (from 25% to 40% over the past decade), the US is the most attractive equipment rental market", said the company in a press statement.

"Although the US construction equipment rental industry has been experiencing a severe downturn since the financial crisis, given the long-term growth prospects of this market, Sumitomo believes that it is an excellent opportunity to enter the industry by making this full scale investment." The deal was completed through Sumitomo's wholly owned US susbsidiary, SMS International Corp.

Sunstate's chairman Mike Watts told IRN that he would remain very much in control of the business and that the investment would strengthen the company's balance sheet and give it the opportunity to expand; "The big benefit is a capital structure that allows us to capitalise on opportunities that we see coming."

Mr Watts said that facilities and people will become available in the short and medium term, as well as some acquisition opportunities. He said the company would look for opportunities to expand its footprint beyond its current operating areas, looking first at adjoining States where existing fleet could be redeployed.

"Our modus operandi is conservative, well managed growth", said Mr Watts, "There won't be overnight changes."

Mr Watts said that Sunstate considered alternatives to the investment by Sumitomo. He said options used by other rental companies, such as issuing bonds at high interest rates, would have meant that the business remained highly leveraged. "We would rather be less leveraged", he said.

It is not Sumitomo's first investment in rental. In its home country of Japan it owns Sumisho Rental Support Corp and in Canada it owns SMS Rents, a 15 branch rental operation. Sumitomo also runs construction equipment distributorships in Canada and the US, mainly selling Komatsu equipment. These distributorships sell €1.15 billion worth of equipment annually.

Sumitomo, which is understood to be the first Japanese company to invest in the US rental sector, said that with SMS in Canada and Sunstate in the US, "Sumitomo is determined to expand its equipment rental business portfolio and become a leading company in the North American equipment rental market."