After months of speculation, the Hertz Corp. announced today that its board of directors has approved plans to separate into two independent publicly traded companies – Hertz, the car rental firm and Hertz Equipment Rental Corp. or HERC. The separation is planned to be a tax-free spinoff to Hertz shareholders. The company has received a private letter ruling from the Internal Revenue Service allowing Hertz to separate the businesses in a tax-efficient manner.

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

Hertz will receive the net cash proceeds from a HERC spinoff 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 which the majority of the shares are likely to be purchased following the HERC separation, depending 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.

Post separation, Hertz expects to maintain a target net corporate leverage ratio of between 2.5x to 3.5x net debt/EBITDA. Given Hertz’s new target net corporate leverage ratio, 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,” said Mark Frissora, chairman and CEO of the Hertz Corp. “Our rental car and equipment rental businesses are leaders in their respective markets with valuable assets and tremendous long-term potential. 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. 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.”

Hertz believes that the separation of the equipment rental business from the car rental would create a stronger growth profile and more competitive position for each company with enhanced management focus, resources and process that are more directly aligned with each business’s unique strategic priorities. The separation would, Hertz believes, allow each business to attract and retain personnel by offering equity-linked compensation, and also create a more targeted investment opportunity with multiples and trading valuations that more accurately reflect the strengths and opportunities of each business.

HERC had annual revenues of more than $1.5 billion in 2013, with 38 percent of its 2013 revenues derived from construction, 26 percent from industrial and 36 percent from other markets including oil and gas and other specialty niche markets such as pump and power, government services and the entertainment industry.

Following the HERC separation, Frissora will continue to lead Hertz as chairman and CEO. HERC will determine and announce its board of directors and management positions as the separation plans are finalized. Currently Lois Boyd serves as president of HERC.

HERC, based in Park Ridge, N.J., is No. 3 on the RER 100.