Last week I had the opportunity to regale you all with anecdotes and cautionary tales dealing not only with soul-crushing and immovable bureaucracy but also the idiosyncrasies of deal making and a select few of the many, many roadblocks and deal-breakers you can see along the way. But it doesn’t always have to be that way. In fact, some deals go so smoothly it seems like no effort is required. Or so I’m told.
Which brings me to this week where I’m going to spend a little time tooting our horn, which ironically is something we don’t do as well or as often as we should, probably because we are too busy with our head’s down working our files. But, as I alluded to some time back, we have been very busy and while the rest of you were spending your summers on the Amalfi Coast, trekking through Nepal or RV’ing across the continent, the Stormont team was hard at work doing what we know nest and love – putting deals into the market, gathering LOIs, managing due diligence and closing deals.
More specifically, in the three-month period ending the first week in October, we landed the plane on behalf of three unique clients, each with their own set of challenges and potential deal-breakers that we had to navigate around during a series of very tight closing windows all while battling the challenges of summer vacations, internal resource allocation and demanding clients.
I don’t know that any of these deals have been made public yet so I will have to keep the discourse anonymous, but here goes.
Consolidating market share
The Client
Our client in this deal was a private enterprise providing Industrial Wastewater Solutions to oilfield clients within Western Canada. What the heck does that mean you say? More specifically, “wastewater solutions” include the provision of septic containment options, waste treatment systems, portable toilets and vac services. As we joked with our client repeatedly – it’s a shitty business but someone has to do it!
The company was owned by two shareholders who had been in business for a long time and had started this particular company about a decade prior. We were originally engaged a year or so back but the market was soft at the time so we weren’t being overly aggressive in our marketing when the first foray showed us we should wait.
As it turns out this was a good strategy because while the market overlooked the deal, the company kept their eye on the ball and was able to triple EBITDA while everyone sat on the sidelines. Fortunately, we also had a pretty good bead on who the buyer was likely to be, but they were absorbing some other acquisitions and needed time so we could afford to be patient.
The Buyer
The buyer in this instance was a global diversified provider of services to the energy sector that has significant operations here in Western Canada including a rental platform that is one of the largest providers of similar wastewater solutions to the Canadian energy sector. This private equity backed company was looking to build out its Canadian presence through the acquisition of complementary businesses and expansion of existing market share.
Why Canada? Why not. This company has long identified Canada as a stable market with great companies and management teams that can be acquired at reasonable multiples.
In this instance, the opportunity to consolidate market share in this space made sense. This is in fact the third acquisition in the space they have done.
The Deal
The deal was pretty straightforward. Notwithstanding the significant growth that the business had seen, we were able to demonstrate to the buyer that the growth was “sticky” and that they weren’t buying at the peak. Accordingly, we were able to get a proper multiple for the sellers and price it off the most recent period as opposed to an over-reliance on prior years. Given we had shareholders who were looking to get out of the business sooner rather than later, it was important that the deal have a certain amount of cash weighting and the buyer was able to accommodate us there while also getting the vendors to take back shares in the global entity which should generate excess return for the sellers over and above the enterprise value at close.
Unique Aspects/Lessons
Clearly the lesson in this is that patience in deal making matters. Our client received three times the price for their business than their original expectation had been when we first met them, so it was a massive homerun for them and highly satisfactory to us. As the first of the three rapid fire closings we had a little breathing room on this one so we were able to help what was a relatively deal inexperienced client over the few bumps along the way. This deal closed on August 11, which was my mother’s 90th birthday – I actually closed off the final deal terms with the buyer while eating cake at her birthday lunch.
New Service Line
The Client
The next deal on the docket was pretty much diametrically opposed to the first one in terms of sophistication. Where one was run out of a home office and had a limited administrative team, this one was run by a group if super-sophisticated industry veterans who could be most aptly described as serial acquirers. Their knowledge of their business was second to none and their books were about as clean and organized as an advisor could ever hope for.
Our teaser document describes the business as a provider of remote communications, portable accommodations and oilfield equipment rentals to oil and gas exploration and production companies operating in northeastern British Columbia and north-western Alberta.
The company operates an industry-leading rental fleet of communications packages, mobile comm. towers, cellular repeaters, intrinsically safe portable radio packages, internet rental packages (cellular, satellite and point to point ISP) and drilling rig camera systems. They also rent wellsite accommodations, and other ancillary 3rd party drilling and production rental equipment (such as tanks, bins, shale sloops, pumps, containment, mats, and centrifuges).
As I mentioned, the shareholder group could be described as serial acquirers, with three of them in a previous life having built a large oilfield services company, largely through acquisition.
The majority shareholder in this instance was a former client as we had previously sold his remote communications business to this entity in what was more of a merger.
In this instance the “burning platform” to sell was the imminent retirement of a couple of the shareholders and a desire to find a complementary partner to help the majority shareholder, who was the main “operating” individual and considerably younger, continue to grow a business that he still had great passion for.
The sellers weren’t in a hurry and allowed us to market the business in a way that allowed us to wait for the most logical buyer at the right time in the current cycle.
The Buyer
Look, it’s going to sound too good to be true, but the right buyer for this company was actually the buyer for our first transaction described above. Go figure and no excuses for it happening this way. It actually worked out for the best for both our clients. And to be fair, great deals for the buyer.
In this case, the platform doing the acquisition was the same – waste treatment, remote communications and wellsite accommodations are rental businesses so they make sense together and the acquirer even had a communications business but what they didn’t have was a significant footprint in the growth areas of the Montney and Northeast BC, nor did they have our majority shareholder who is a great operator and a terrific complement to their existing executive team. So a win all around.
The Deal
As I mentioned before, this company was very sophisticated from a financial perspective and knew precisely what they wanted from the deal and understood what the buyer was all about and indicated early on they were willing to accept equity risk. From the buyer’s perspective that was important as well because they were very focused on keeping the majority shareholder involved in their business for a s long as possible. Fortunately for timing, our client’s business had been growing and exceeding its budget for month after month during the time we were negotiating the LOI and directing diligence. The ultimate deal that was struck was much more equity weighted than the first one I described but that was primarily driven by a desire to have a “golden handcuff” on the one shareholder and much less risk aversion on the part of the collective vendor group. Regardless, cash paid was market and the use of shares allowed us to get to a valuation our clients were happy with.
Unique Aspects/Lessons
This one was unique in that it was the same buyer for two consecutive deals. It wasn’t planned to be so tight and we wrestled with how to handle it when it became apparent that things were going to run concurrently – we needed to of course maintain our high levels of client service and get both deals done to our clients’ satisfaction. Ultimately success in both these came down to a combination of factors, not least of which was the sophistication and organization of this client allowed the diligence to proceed with barely a hint of a hiccup. Added to this was dealing with a buyer that we were familiar with and that had a lot of integrity so there was a lot of mutual trust that we were going to get both deals done without any “monkey business”. Sophisticated buyers and sellers can make deals go much more smoothly especially when egos don’t get in the way.
Plus it was fun to sell this business a second time – repeat business is very rare in our world!
Rescuing Canada’s Health Care System One Piece at a Time
The Client
Look – a non oilfield service business with a different buyer!
This particular deal is very interesting to us not only because of the sector it is in but also because of what it taught us about Canada’s health care industry and how it works.
First off, let me introduce the business to you. The company provides occupational medical physician services, occupational healthcare services, occupational hygiene, and emergency medicine services in remote industrial environs. Clients include large energy, infrastructure, mining, military, and government clients across Canada.
What does that mean? Well it means that when large infrastructure projects are happening, Canada’s health care system isn’t equipped to cope so we have to turn to the private world, which consists of publicly paid medical professionals supplementing their income working in the private sector, which as we all know isn’t actually a thing in Canada.
Except it is. Canada is overrun with private companies providing medical services inside the public system or adjacent to it, because that is the reality of a world that is under staffed, under funded and, without fail, not “under”stood.
So, our client provides health care services to large industrial clients, such as mines and pipelines which is critical care, testing and other services that helps reduce downtime, incidents and improves outcomes.
Our client started their business before COVID working mainly industrial activity around mines and then once the pandemic hit, the need for their services literally exploded resulting in a near 1000% growth rate over a few years. To say that growing pains were a feature of their operating world would be an insult to growing pains.
Part way through this growth, a (perceived) saviour appeared in the form of a pre-emptive buyer – a large, multi-billion strategic that operated in direct competition and peripheral business lines to our client.
We were engaged to help that process and quickly realized that there should be multiple buyers for a business experiencing such growth.
As the engagement progressed, it became apparent that the corporate buyer, while it would certainly meet the needs of the vendors for liquidity and enhanced controls and admin capacity, was maybe not the best “fit” for the company. As it turns out, we didn’t need to worry as the pre-empt elected to pull out of the process at the 11th hour when its board decided that it needed to pivot its strategy – thank you so very much.
Undeterred we took our client to market and quickly found a counterparty that was at once acquisitive but also intimately aware of what our client did, why they did it better and why they needed to be acquired.
The Buyer
In this instance, the buyer is a large strategic based in Canada. One of many private providers of health care inside of the public system. These companies are largely unknown because they aren’t “front-line”. Rather they are the staffing companies that provide and dispatch hundreds of nurses or paramedics. They provide home health care. They assist with pharmacare and mental health and end of life care. They are the glue outside of what we know as the “public system” that keeps a significant portion of this health care house of cards upright.
Contrary to what many Canadians think, there are many of these companies. And they are essential. As well as nimble and entrepreneurial.
At any rate, this was the right company at the right time for our client.
The Deal
This one was different. It is hard to buy into one the few growth industries in Canada (health care). Revenues keep growing. But you never know when the government will get back in the way. Our client grew from $3 to $30 million over a few years. What is sustainable? What’s the floor? What’s the CEILING?!?!?!?!? It is a hard business to value. Ultimately the buyer did a very smart thing. They wanted to tie the vendors up for at least a few years but also reward them for what they had built so they bought a majority of the business.
This had the dual effect of keeping the brand for the customers as well as making sure that the vending shareholders were deeply invested in the success of the business going forward. This is different than issuing shares of the mother ship to the vendors – in this case the “payday” is 100% dependent on them delivering growth… but they got paid fairly for the value they had created to date.
Oh, and health care multiples are not oil field service multiples.
Unique Aspects/Lessons
Sheesh. Too many to think about. The diligence process for this deal started during the summer and ran through the whole period we were working our other closings. We sure hope all of this was invisible to our clients – we tried our best.
Also, any company that has experienced such rapid growth is sure to have its warts and pimples and this group was no exception. This is not to be critical – they are great operators, but when your business literally explodes off the start like an F1 car, it’s hard to keep on top of everything. To their credit they hired an accounting firm and fractional CFO to keep things in line and without that resource I doubt they would have sold.
The biggest lesson of course is the time-wasting from the pre-emptive buyer. I don’t care if you have billions. If you are messing around with my client and spinning wheels and changing strategy, you need to step aside or allow us to be in a competitive process. Nothing focuses the mind more than someone wanting the same thing you do. Case in point – discussions with strategic buyer… 12 months. Time from re-intro into the market to close? 4 months. While the advisory form was running two other complex deals. Those are good odds.
Oh, and deal-breakers encountered along the way on this one? Too numerous to mention.
But we did it.
Like we always do.
