(Reuters) -U.S. machinery rental firm Herc Holdings is poised to acquire smaller rival H&E Equipment Services for $3.83 billion excluding debt, after outbidding leader United Rentals, according to company statements on Tuesday.

The cash and stock deal would combine the world's third and the fifth-largest firms that rent machinery for construction sites. United Rentals, which last month entered an agreement to buy H&E, dropped the deal.

Equipment rental is in growing demand as contractors find it more cost-effective to outsource anything from pumps to air conditioning to their construction sites rather than owning them.

The largely fragmented rental machinery industry has been under consolidation for more than a decade.

Shares of H&E rose 14% following the $104.59 per share offer from Herc - $78.75 in cash and 0.1287 shares of Herc common stock - a premium of nearly 20% on the stock's last close on Friday.

The transaction was valued at $5.3 billion, including about $1.5 billion in debt, compared to United Rentals' $4.8 billion bid. The industry leader had offered $92 a share, or $3.37 billion in equity value, based on a Reuters calculations.

Herc successfully gatecrashed the deal during H&E's 35-day "go-shop" period following United Rentals' bid. The uncommon outcome finds the target company choosing a smaller and more advantageous suitor for its business acquisition.

"We view the deal announcement as bold and a surprise," said John Healy, an analyst with Northcoast Research firm, adding the bid was a bit on the rich side but will lead to significant cost cuts and potential growth.

Louisiana-based H&E said on Tuesday it had notified United Rentals that it intends to cancel their merger agreement, to enter one with Herc instead.

United Rentals answered it does not intend to submit a revised proposal and is dropping the plan.

Herc and H&E have more complementary portfolios by fleet-mix, including earthmoving and general rental equipment, according to Barclays' machinery & constructionanalyst Adam Seiden.

"Herc's 'over-the-top' purchase of H&E is the alternative that made sense all along," Seiden said in a note. "Scale doesn't come cheap, but it's the growth that investors favor."

Herc has agreed to pay the termination fees of $63.52 million that H&E owes United Rentals for ending their merger agreement. The deal is not expected to face regulatory impediments, according to a person familiar with the matter.

Founded in 1961, H&E provides a rental fleet including aerial work platforms, earthmoving equipment, material handling equipment and other general and specialty lines of equipment.

"With H&E's acquisition no longer an option, we wouldn't be surprised if United Rentals pursues other opportunities this year," JPMorgan analyst Tami Zakaria said in a note.

(Reporting by Sabrina Valle in New York, Shivani Tanna and Aishwarya Jain in Bengaluru; Editing by Mrigank Dhaniwala, Krishna Chandra Eluri, Shinjini Ganguli, Alexandra Hudson and Varun H K)