Sofame Technologies Inc SFMGF

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Sofame Technologies Inc. : Sofame Plans Acquisitions, Stock Exchange Switch to Bulk Up - FT Merger Markets

11/27/2013 | 07:58pm US/Eastern

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FT Merger Markets

(Originally Reported in November 2012)

by Arielle Bikard, Boston

Sofame Technologies (TSXV:SDW) (OTC:SFMGF), the Montreal, Quebec-based maker of energy-efficient heat-recovery equipment, plans to make leveraged acquisitions to bulk up within two years, said CEO John Gocek. Sofame is working with an undisclosed New York-based financial advisor for the acquisitions and the upgraded US stock exchange listing, said Gocek. He added that he would like to hear from advisors with more potential acquisition targets for Sofame. Although the company has only a CAD 3.25m (USD 3.27m) market cap, it has identified three targets with combined sales of USD 55m and has arranged investors to fund the USD 27m needed to purchase them, using cash, debt, and earn-out provisions, Gocek said. Sofame plans to execute the deals through a US based holding company, possibly Chicago, Illinois-based Sofame Energy, and then transition Sofame Technologies into an Albany, New York-based company listed in the US, he explained.

The company's business was struck by the recession in 2009/2010 and low natural gas prices, and Gocek said he downsized the company "brutally" two years ago, cutting costs by 90%. Following the planned acquisitions, the combined company would have seven proprietary engineered product lines instead of one, and would have capabilities in controls, programming, and manufacturing, said Gocek. "We could be a USD 50m company this time next year," he said. Since the market does not care that the company has become profitable, Sofame will instead grow by acquisition, said Gocek. "Part of the motivation for the move to the US is to facilitate the sales process in the US market."

One of the current targets is a US-based coil manufacturer, which is also occasionally a competitor, and the other two companies are in Canada, he said. Gocek said that it's a good time to buy companies because they are depressed and bankers don't believe small private companies will achieve their forecasts. Sofame uses Montreal-based law firm Heenan Blaikie and Montreal-based accounting firm Brunet Roy Dubé. The company deals with HSBC but does not have a borrowing facility there, as it has typically been financed with private money, said Gocek. Following these buys and listing on a US exchange, Gocek said the company would need to run for two years to prove the integration is successful, and then Sofame could be sold.

Companies naturally interested in Sofame's products would include custom equipment businesses that provide energy engineering such as General Electric, Babock & Wilcox, or Alstom, or a large company in the boiler business, said Gocek. Sofame probably wouldn't be a target for a contractor such as Emcor because they are vendor neutral, he explained. During informal discussions, GE Canada previously said it would buy Sofame if it got to USD 20m in sales, Gocek said, adding that if Sofame got to 20m in revenue, they would prefer to remain public and set their sights on building revenues to USD 100m. For future buys, the company is interested in boutique engineering companies with USD 5m to USD 10m in revenue that would expand Sofame's US geographical reach and technical capabilities in power plant engineering, he said. Attractive geographies include California, which is an environmentally conscious market with many boilers, and New England, where natural gas is expensive. Targets should have technology in boiler lines, combustion engineering, and boiler room controls that can be easily integrated, he said.

Sofame has to refinance its current liabilities, but Gocek said he is having trouble finding a long-term lender. The company has a history of losses, even though it is profitable now. Its annual audit, due out in December, will make a difference, he predicted. The company is currently doing a private placement of USD 250,000 under the TSX's financial hardship exemption. As part of its downsizing, the company has had a two-year drive to outsource its equipment manufacturing, so that it is no longer tied to its plant, said Gocek. This has allowed the acquisition idea to develop, said Gocek. Although Sofame is listed as an equipment manufacturer, it is really a "custom engineering cleantech company" with products that have a one-to-three-year payback, he said. The company projects 50% growth next year to CAD 3m in revenue, said Gocek.

To increase sales organically, Sofame is pursuing sales channel partnerships, said Gocek. It already has an agreement with Emcor and is in talks with Ameresco and ABB. None of Sofame's approximately 1,200 shareholders has a controlling interest in the company, Gocek said. The management team and board members hold about 9% ownership, he added. After the three acquisitions, the new management team will own up to about 15% of the new company after dilution, he said. There are about five companies with competing heat recovery systems, and they are also small businesses facing similar sales marketing and financing challenges, said Gocek.