Interesting Read!In an article published in the March 20, 2013 Globe and Mail Fabrice Taylor wrote about so called “Pickaxe” stocks. In the Klondike some people struck gold and most did not. However the pickaxe salesman always made money. One of the stocks he mentioned was Loyalist Group. This is a young company that is consolidating English Second Language (E.S.L.) schools. He reckons that this is a de risked play on the emerging markets.
Loyalist Group is potentially a classic example of a company pursuing a roll up acquisition strategy. It operates in an industry with literally thousands of small language schools, many of which the owners would like to sell. This strategy has worked in many fragmented industries.
The US Banking industry post interstate deregulation is a fine example. Bank One, the company Jamie Dimon merged into J P Morgan Chase acquired hundreds of banks in the 1980’s. Among local companies Couche Tard and Genivar have employed similar strategies in different industries. In the 1980’s and 90’s the Loewen Group rolled up family funeral homes in Canada and the US into a major company with 15000 employees. It was undone by a breach of contract suit in Mississippi which cost them $500M on a $4M acquisition and resulted in their subsequent bankruptcy.
Joseph Bower in “Not all M & A’s are alike and it Matters” Harvard Review article classifies Geographic Roll ups as a win – win type of acquisition. The acquiring company can install its streamlined processes to the acquired company whilst maintaining their identity, their customers and their people. They can slowly integrate them into the new corporate culture. This lowers the acquisition risk. The risk is also lowered due to the small scale of each individual acquisition. The company is not “betting the farm” unless it plays free and loose with the laws of a state like Mississippi.
Loyalist Group became an English Second Language company ( previously an insurance broker) in October 2010 as a result of a reverse takeover by McKinsey International College. MIC was founded and run by Andrew Ryu, a McMaster and University of Toronto grad. The new Loyalist set as its mission to be the dominant force in English Second Language tuition in Canada in 5 years. They saw the opportunity to consolidate in a fragmented industry where small undercapitalized operators were restricted in their expansion options.
Loyalist made 4 acquisitions in 2011, 2 in 2012 and 1 so far in 2013. They paid between $400k and $1.4M for these companies at about 5 times EBITDA and obtained 2 -3 times revenue. These schools operate as independent operators each with their own identities. The opportunity for Loyalist is in the back office. These schools pay up to 40% of the tuition fees to agents in the form of commissions. Economies of scale in this area can produce significant improvements to the bottom line. Loyalist acquired a South Korean agent in 2011 to begin this process.
Loyalist has been successful in financing its growth although it was a struggle at first. It has had several stock offerings since October 2010 but had to resort to a series of loans at prime plus 10% in 2011. Things turned around in 2012 with a successful $2M offering at $0.20 in which two significant players participated. They were Seymour Schulich, the philanthropist and entrepreneur, and James Patterson, the diplomat and politician. Schulich now owns 15.3% of the company.
Loyalist is on its way. Shares are approaching 60 cents and the market cap at $62M. We will follow their progress over the next few months to see if they can continue their growth path.