Calgary, Alberta / December 8, 2014 / Like veins and arteries in the human body, infrastructure is absolutely vital to a city. Infrastructure promotes commerce, facilitates exports and can be big business. Hedge funds, private equity and even sovereign wealth funds routinely invest in toll roads, bridges, utilities and port facilities around the globe. What’s the allure of such investments? Long-term, steady, recurring revenues. In many instances the growth in revenue is thought to be at about the rate of GDP in the region. In a world with unusually low interest and stock markets at all-time highs, the hunt for decent returns is on. Clearly, it makes sense to invest in fast-growing parts of the world, but to mitigate risk it also makes sense to invest in safe places.
The next best way to invest in infrastructure build outs and the maintenance of these assets, is to invest in companies that provide essential services to support and grow infrastructure needs. Attractive investments are not easy to come by. Investing in large, publicly-listed companies might give one the desired exposure, but large enterprises are typically tied to the volatility of the stock markets. Instead, smaller companies involved in the space have the distinct advantage of being able to grow rapidly through acquisitions. Acquisitions not only move the needle, but also diversify revenue streams and mitigate overall risk. Even better would be a small publicly-listed company that is actively rolling up private, “mom & pop shops” that can be acquired at very attractive valuations. One such company, one of the very few doing this in Alberta, is TSX Venture-listed QE2 Acquisition Corp. [TSXV:QE]. “QE2” refers to the north-south Alberta highway that connects its two largest cities: Calgary and Edmonton. Effectively, it’s the backbone that keeps Alberta moving. A company like QE2 should have low correlation to the overall stock markets as it pursues its roll-up strategy.
First Two Acquisitions
QE2 has already made two acquisitions; the first was Pillar Contracting in October, 2013. The primary services of portfolio company Pillar include; street light bulb replacement and post painting, safety testing for street light integrity, traffic lights maintenance and flagging services, among other things. Pillar had a 16 year history of success and growth prior to being acquired by QE2 and has its sights on continuing this trend. Importantly, the Founder of Pillar agreed to continue to operate the business – a common theme among QE2’s acquired portfolio companies. As part of QE2, Pillar has access to a strong customer base including major utility companies and municipalities in Alberta and Saskatchewan. Pillar offers QE2 possible expansion into the private sector with a focus on parking lots, transmission boxes, cable boxes and oversized loads. Therefore, like QE2’s other portfolio business and acquisitions to follow, low-risk, high visibility recurring revenue streams through service and maintenance are the key.
Candesto Enterprises was acquired in April, 2014. Primary services include, assembly and installation of highway signs, guardrails and miscellaneous fencing installations. Candesto had a successful operating history of over 20 years and the Founder is willing to stay on for another five years. Therefore, QE2 management expects consistent margins and operating performance from Candesto. Candesto’s customer base includes municipalities and general contractors.
These two acquisitions are examples of the private companies that make the grade: steady growth, solid margin companies on their own, but combined with other portfolio companies, ample opportunities for synergies. The client base of each acquired company instantly becomes customer targets for all of QE2’s portfolio companies. In a recent interview, CEO and Director Mr. Mihali (Mike) Belantis commented, “Our companies provide niche or speciality services to the municipalities and blue chips, meaning the likes of Epcor and Fortis. So QE2’s companies are not directly exposed to the cyclicality of the oil and gas sectors but instead to the infrastructure and utility investment by the province and secondary enterprise in Alberta. And our oil & gas exposure is further dampened by the fact that a significant portion of our revenue comes from maintenance work in addition to installation work.”
QE2 is an M&A expert and has a pipeline of future acquisitions that it believes could vault annual revenues from about $10 million to $100 million by 2018. For each deal they commit to, they pass on many others. Finding companies that are the right fit is what the management team specializes in, and this is a company with a top-tier management team by any measure. Growth in 2015 is expected to be robust with the acquisition of 2-3 new portfolio companies.
Why Alberta?
Earlier I mentioned that hedge and private equity funds can earn attractive returns by building infrastructure. A way in which they can boost equity returns is by employing debt. As a public company with strong financial backers, QE2 also has access to debt. QE2 uses a prudent mix of debt, cash on hand and QE2 shares (some of which go to the principals of the private companies) to make acquisitions. Over time, synergies could become an important growth and margin enhancer.
QE2 has a very well done and informative corporate presentation. According to its November slide deck, “Alberta is growing at the fastest rate of any province in Canada and has been the leader of economic growth for the past 20 years. Exceptional economic landscape is backed by aggressive government plans to continue building new infrastructure over the next decade. Projected infrastructure growth due to the economic growth and continued population expansion provides a fertile platform for business. Alberta’s economic expansion is expected to accelerate to 3.7% in 2014 after gaining momentum through 2013. Alberta’s robust outlook builds on an estimated 3.3% expansion in 2013, the fourth straight year above 3.0%, outperforming Canada and U.S. economic growth.”
As a recent example of Alberta’s commitment to growth, on November 10th Alberta and Ottawa signed a renewed, expanded deal to deliver $2.3 billion in gas tax funds to help municipalities build infrastructure. These funds are designed for important core civic infrastructure. The deal will deliver $208 million to Alberta this year and a total of $2.3 billion by 2024. Of course most Canadians already know that Alberta is a leader in investment, population growth, exports, GDP, housing, construction and employment growth. However, I should add that Alberta’s growth has been among the strongest of any region in North America.
Conclusion
Investing in infrastructure and utilities through hedge funds and private equity is out of the reach for most investors. A good way to get exposure to what the, “smart money” is doing is by investing in QE2 Acquisition Corp. As one of the first and most aggressive aggregators of solidly profitable Albertan private companies, investors get the best of both worlds- a strong underlying economy that supports growth and relatively low-risk businesses that taken together, make the whole less risky than the sum of the parts. Furthermore, I believe over time that QE2 should exhibit low correlation to the overall stock markets, a distinct advantage compared to larger less diversified peers. With a tight share structure of 28.5 million shares with and just over 15 million free trading shares at this time, QE2 is definitely a company worth looking closely at.
Please click on the following links for more information:
Corporate Homepage:
Bob Moriarty article November 24th.
Interview with CEO November 19th.
By Peter Epstein
Disclosure: Mr. Epstein owns shares of QE2 Acquisition Corp. This article and all articles written by Mr. Epstein does not represent investment advice and express his opinions only. Mr. Epstein is not a registered investment advisor. Readers should consult with their own investment advisors before considering buying or selling any securities mentioned in this article. The author has been retained by QE2 Acquisition Corp for consulting purposes.
CONTACT INFORMATION
QE2 Acquisition Corp.
Mihalis Belantis
CEO and Director
(403) 701-7299
[email protected]
SOURCE: QE2 Acquisition Corp.
