Dealers looking for off-rental vehicles from Hertz will be seeing them coming from a newly created operation. The Hertz board of directors announced on Tuesday that it approved plans to separate into two independent, publicly traded companies.

The two companies will be Hertz, comprised of the Hertz, Dollar, Thrifty and Firefly rental car businesses as well as Donlen, a provider of fleet leasing and management services, and HERC, the Hertz Equipment Rental Corp.

Officials explained the separation is planned to be in the form of a tax-free spin-off to Hertz shareholders, and the company has received a private letter ruling from the Internal Revenue Service that allows Hertz to separate the businesses in a tax-efficient manner.

Hertz expects the separation of HERC to close by early 2015.

Officials indicated Hertz will receive net cash proceeds from a HERC spin-off of approximately $2.5 billion that will be used to pay down Hertz debt and support a newly approved $1 billion share repurchase program.

Under the new share repurchase program, officials explained the majority of the shares are likely to be purchased following the HERC separation, dependent on market conditions. The share repurchases could reach 20 percent of Hertz’s outstanding shares of common stock, which includes the $1 billion already approved. This new program replaces the $300 million share repurchase program that the Company announced in 2013, under which the Company has utilized approximately $87.5 million to repurchase Hertz shares.

Post separation, Hertz expects to maintain a target net corporate leverage ratio of between 2.5 times to 3.5 times net debt / EBITDA.

Given Hertz’s new target net corporate leverage ratio, Hertz Corp. chairman and chief executive officer Mark Frissora said the company may opportunistically look to return additional capital to shareholders on an ongoing basis, subject to market conditions and other factors.

“The actions announced today will create separate companies which we expect to benefit from improved financial profiles that include increased earnings stability and higher returns on capital,” Frissora said.

“Our rental car and equipment rental businesses are leaders in their respective markets with valuable assets and tremendous long-term potential,” Frissora continued. “Through unbundling these undervalued assets, we unleash current and future shareholder value.

“In fact, we believe there is a potential for multiple expansion even if both businesses only trade in line with their peers,” he went on to say. “Additionally, the separation will help each business focus on its strategic and operational performance. With respect to capital allocation, our new leverage ratios may allow for incremental return of capital to our shareholders given the current credit environment."

The Hertz board believes the planned separation of the equipment rental business from the car rental business would, among other things:

— Create a stronger growth profile and more competitive position for each company with enhanced management focus, resources and processes that are more directly aligned with each business's unique strategic priorities.

— Optimize the companies' capital structures based on the objectives of each independent company.

— Allow each business to attract and retain personnel by offering equity-linked compensation.

— Create a more targeted investment opportunity with multiples and trading valuations that more accurately reflect the strengths and opportunities of each business.

Following the separation, Hertz said will remain a rental car company with approximately 11,555 rental locations throughout North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand.

The company’s portfolio of brands includes Hertz as well as Dollar, Thrifty and Firefly, which reach other fast growing consumer segments within the leisure and value markets.

Through Donlen, Hertz also offers fleet leasing and management services.

Officials highlighted the rental car and fleet leasing business had annual revenues of $9.23 billion in 2013.

Hertz emphasized it will continue to focus on its key growth drivers following the separation. These include the integration of Dollar Thrifty, expanding its off-airport footprint and driving fleet efficiency, the introduction of new mobility services to meet consumer needs, building on its success with Donlen leasing, the roll-out of new rental technology, and its Lean/Six Sigma cost management programs.

The company expects the separation of HERC to lead to an improved financial profile for Hertz, including less earnings volatility, higher returns on invested capital, and accelerated free cash flow growth. Hertz will target a corporate leverage ratio of 2.5 times to 3.5 times net debt / EBITDA.

“Post separation, the corporate leverage ratio is expected to be at the lower end of this range,” officials said. “This provides strength and flexibility across market cycles as well as a better ability to opportunistically return capital to shareholders.

“These financial strengths, together with the improved operating focus enabled by the separation and the continued operating and financial outperformance of the Hertz business, are expected to support a higher trading multiple for the new Hertz,” officials went on to say.

Following the HERC separation, Frissora will continue to lead Hertz as chairman and chief executive officer. HERC will determine and announce its board of directors and management positions as the separation plans are finalized.