March 30, 2016
Enercare Inc.
Strategic and accretive U.S. expansion
Our view: Despite what we view as paying full value for Service Experts (12.3x 2015 Adjusted EBITDA), we favourably view the US$341 million acquisition because it is immediately accretive, a strong strategic fit for Enercare, and provides the company with multiple levers for future growth. We are increasing our price target to $18 (from $17) to reflect the improved prospects for growth.
Key points:
Service Experts acquisition drives material distributable cash flow accretion. Enercare agreed to acquire Service Experts for US$341 million, which management expects to close in Q2/16. Service Experts has 2,800 employees, and is a leading residential and commercial provider of HVAC service and repairs and related services in 29 states in the United States and three provinces in Canada. Management estimates that the acquisition would be 18% and 25% accretive to Normalized Distributable Cash Flow/share for 2015 and 2016, respectively. Please refer to page 5 for an overview of Service Experts and Exhibit 5 for our accretion analysis.
A strong strategic fit with embedded upside. We believe Service Experts' platform complements Enercare's business by providing it with an expanded geographic footprint and access to a new customer base. This acquisition should provide the company with multiple levers for growth, both organic and through consolidation opportunities. There may also be some potential cost synergies given the increased scale, and we believe there is a longer-term opportunity to roll out rental offerings (e.g., HVAC and water heaters).
Funding sources provide flexibility. To finance the acquisition, Enercare obtained a 4-year US$200 million term loan facility, and issued $240 million (including over-allotment) of subscription receipts ($15.25/share). In addition, Service Experts executives agreed to purchase $1.7 million of subscription receipts by way of private placement. Proceeds in excess of the acquisition price and transaction costs will be used for general corporate purposes, including debt repayment. Please refer to Exhibit 3 for details.
Increasing estimates. We have increased our 2016 and 2017 ACFFO/ share (diluted) estimates to $1.06 and $1.37, respectively (from $1.05 and $1.29, respectively). Our changes primarily reflect the Service Experts acquisition, Q4/15 results, and higher forecast maintenance capex. We note that management expects the transaction to close in Q2/16, and as such, the first full year of contribution will be 2017.
Increasing price target to $18 (from $17). We have increased our price target to $18 (from $17) to reflect the proposed acquisition of Service Experts. Our price target is based on 13x (unchanged) our forecast 2017 ACFFO/share.