“Albertans created QE2 Acquisition Corp. with the true Alberta spirit of determination and the desire to create opportunity within the local economy through innovative vision and hard work. It was an idea six years in the making, formed while living and working within the province’s rural towns and urban centers. The relationships that were forged during this period would eventually culminate to form QE2 – from influential finance professionals to research analysts, salespeople and marketers, to business owners and families. QE2 is a company forged by a group of organized, motivated and extraordinary people with a vision to do extraordinary things.”
QE2 Acquisition Corp.’s Robust Growth Marks This Compelling Infrastructure Play
QE2 Acquisition Corp. (formerly Crowsnest Acquisition Corp.. TSXV: CAW.P) recently announced that it has closed its qualifying transaction by way of Crowsnest purchasing all of the issued and outstanding common shares in the capital of QE2 Acquisition Corp., and warrants to purchase QE2 Acquisition Corp. shares. This resulted in QE2 Acquisition Corp. becoming a wholly-owned subsidiary of Crowsnest. The combined entity changed its name to QE2 Acquisition Corp and trades under the symbol (TSXV: QE). QE2 Acquisition Corp., “QE2” has exactly what investors are looking for–positive normalized cash flow, a strong, low-risk growth profile through acquisitions and good financial visibility. QE2 has these attributes and more, a company with solid margins, closely tied to one the strongest economies in North America– Alberta, Canada. Canadians have been well aware of the booming economy in Alberta for years, now Europeans and Americans are looking for investment opportunities in Alberta as well.
QE2 truly has the best of both worlds, a growing, diversified portfolio of low-risk business, driven by strong growth markets in Alberta. Clients are municipalities, major utility and construction companies that primarily depend on general economic and population growth rather than cyclical factors. Current acquisition targets have a proven track-record of bottom line growth. Investors in this dynamic company receive exposure to infrastructure-focused companies that have proved resilient across a wide spectrum of market conditions. The secret sauce, which I will get into in more detail later, is the powerful combination of enhanced access to capital for growth constrained target companies and the opportunity for synergies among portfolio companies over time.
I’ve met with and spoken to some key people and I know the company’s new CFO Robert Harding from his time as CFO of a billion dollar oil sands company. This team has a tremendous skill set and they get things done. Further, QE2 has attracted a strong base of committed investors. CEO Mike Belantis said,
“We aim to grow QE2 through accretive acquisitions, organic growth from synergies realized by vertical and horizontal integration opportunities, sales and marketing channel expansion and access to available capital. The objective is to grow QE2 to $100 million in annual revenues by 2018.” [Please see Management Bios below].
Alberta, Canada Hard to Find a Better Place to Invest
Before I launch into the exciting story unfolding for QE2, it’s vitally important to understand the economic strength of Alberta’s economy. If one wanted to start a new business anywhere in North America, Alberta would be at the top of the list. There are several websites that describe Alberta’s vibrant economy, but I believe that a June, 2014 report from RBC summarizes the situation especially well. Please consider the following four quotes from that report,
“The contrast between booming conditions in one province (Alberta) and more moderate pace of growth everywhere else in the country rarely has been as stark, with Alberta this year far outpacing all other provincial economies. We expect all provincial economies will grow in 2014. Alberta will far outpace all others…Virtually every indicator continues to point toward booming conditions in the province. We expect this boom to continue. The bright job prospects in the province represent a powerful magnet to attract workers from outside the province—from both other provinces and countries—and strong immigration in turn will remain a main conduit to growth.”
“Alberta’s economy is in a class by itself in Canada. It has grown by an average growth rate of 4.3% in the past four years or almost twice the national average during that time. Last year, it grew by an estimated 3.7%, which would be a very strong rate that we expect will be replicated in 2014. Not only would this rate place Alberta far atop the provincial growth rankings this year, but also it would make it the lone province above the 2014 national average of 2.4%—a feat without precedent in the history going back to the early 1980s.”
“At its core, brisk activity in Alberta finds much of its source in the booming energy sector with massive investment in the oil sands still ongoing and crude oil production rising rapidly. More and more, the expansion is being fuelled by gains in a broader spectrum of economic sectors. Very strong population growth—the strongest seen in 30 years in the province—for instance, pumps up demand for housing and a wide array of consumer goods and services.”
“Almost everywhere we look, we see signs of a booming economy. Merchandise exports were up 16.0% year over year in the first quarter. Sales of manufacturers, wholesalers, and retailers were up 8.4%, 5.2%, and a very strong 10.0%, respectively, on the same basis. Increases in crude oil production were in the vicinity of 8% early this year. Housing starts stood 12.0% above year-ago levels in the first four months of 2014. Non-residential building construction climbed a solid 8.5% in the first quarter from the same period in 2013. In all this, the private sector remained in hiring mode, thereby boosting total employment by 3.3% compared to a year ago. Indeed, Alberta’s economic performance continues to impress and appears to be comfortably seated in the driver’s seat to drive growth in Canada.”
In pouring over the substantial amount of data in the RBC report, one thing that also stands out is Alberta’s unemployment rate in fiscal 2015 is forecast  to be 3.9% vs. 6.6% for Canada as a whole. A 3.9% unemployment rate is one third that of western Europe!
An investment in QE2 is like an investment in Alberta on steroids. QE2 is penetrating this booming economy with targeted acquisitions of private companies at very attractive valuations. Once these acquisitions are integrated, which is typically easy because the businesses are largely run autonomously, the whole becomes worth substantially more than the sum of the parts. Private companies frequently lack access to growth capital and debt financing. As a growing public company with committed stakeholders, QE2 has ready access to both and will use a prudent mix of cash, equity and debt to continue acquiring new businesses. Each acquisition will not only make the company larger and stronger, but will also diversify revenues and profits. This roll-up strategy of attractive, but growth constrained companies into a vehicle that can comfortably utilize debt and share best practices across all portfolio companies is a proven model in many industries.
How a Portfolio of Otherwise Boring Companies Adds Up to a High-Growth Investment Vehicle
QE2’s strategy is to acquire infrastructure-focused service providers in Alberta and improve their performance through superior operations management and business plan execution. QE2 has already completed two private company acquisitions. Pillar Contracting was acquired in October, 2013 with 2013 normalized EBITDA of $0.56 million. The implied valuation of Pillar Contracting was an attractive 2.4x EV/EBITDA. 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. Importantly, the Founder has agreed to continue to operate the business, a common theme among acquired portfolio companies. As part of QE2, Pillar has a strong customer base including major utility companies and municipalities in Alberta and Saskatchewan. Pillar offers QE2 access to both expansion into Saskatchewan (and possibly Manitoba) as well as 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 acquired businesses to follow, low-risk, high visibility recurring revenue streams through service and maintenance.
Candesto Enterprises was acquired in April, 2014. Highlights of this portfolio company is that it had 2013 EBITDA of $1.5 million, implying an EV/EBITDA multiple of just 1.8x. Primary services include, assembly and installation of highway signs, guardrails and miscellaneous fencing installation. Camdesto had a successful operating history of over 20 years and the Founder is willing to stay for another five years. Therefore QE2 management expects consistent margins and operating performance in the future. Candesto’s customer base includes municipalities and general contractors. Given Candesto’s experience and efficiency in guardrails and signage installation, direct competitors are likely to subcontract the company’s services to the benefit of QE2 overall. These two acquisitions are instructive, steady growth, solid margin companies on their own, but combined with other portfolio companies, ample opportunities for synergies arise. The client base of each acquired company instantly becomes customer targets for all of QE2’s portfolio companies.
Synergies Could be Significant Over Time
Another example of synergies that can be exploited is in the area of operations management and equipment/facilities maintenance and procurement. Centralizing these key functions across a much larger base provides economies of scale and opportunities to cut costs and enhance margins. Even just a 5% margin boost from an acquired company would make a big difference as the benefit to the bottom line flows through year after year. Importantly, each portfolio company will have increased access to growth capital from its QE2 parent, meaning that BOTH margins and the top line should grow faster and more sustainably than they would as private standalone companies. That’s a prime reason why QE2 can acquire companies at attractive valuations…they have so much to offer the selling companies that it’s a win-win for everyone.
ValuationÂ
QE2 is new to the market, but there are a number of comparable companies to consider when valuing the company. The average Enterprise Value, “EV”/EBITDA ratio of peer companies is roughly 5x-6x. By comparison QE2 estimates its 2015 EV/EBITDA ratio will be 5.2x based on its two closed acquisitions. Recall, QE2’s two portfolio companies, Pillar and Candesto were acquired at implied EV/EBITDA ratios of 2.4x and 1.8x, respectively. This is at the lower end of the range of company guidance to make acquisitions of companies at an EV/EBITDA ratio of 2x-4x.
Therefore, I think that with additional accretive acquisitions the valuation gap to peers might grow, but as QE2 establishes itself as a true peer, the valuation gap will diminish by way of the company’s stock price rising. Especially as QE2 is the only pure-play infrastructure services company focusing on Alberta. With only 28.5 million basic shares outstanding, this is a stock that could move up quickly on good news. The last equity financing was done at $0.30 per share, so the market cap then was $8.6 million.
Importantly, the valuation really gets interesting if, for example, the company’s next acquisition is done at a 2.0x-3.0x EV/EBITDA multiple and this hypothetical deal doubled revenues and normalized EBITDA. An acquisition like this, if valued at a 5x-6x multiple by the market, would essentially double the value of QE2 to shareholders. Perhaps even more than double the equity value if a prudent amount of debt were to be used to close the acquisition. As long as too much debt is not deployed, rolling up private companies into a public vehicle is a proven strategy for success in multiple industries.
The company’s stated goal is to achieve $100 million in run-rate revenues by 2018. This might sound like a lofty goal, but with each portfolio company acquisition, QE2’s ability to prudently utilize debt and cash and raise success-based equity capital will only get stronger. Further economies of scale will accrue to the company. Synergies will be spread over a larger group of owned companies. And, of course, cross-selling opportunities will increase with each and every acquisition. All of the above does not even consider the possibilities of entering Manitoba and Saskatchewan in the future. Along the way, if QE2 executes on its plans, the company itself could become a takeover target.
Conclusion
In a stock market marked by the TSX Composite and S&P500 near all-time highs, it’s getting harder to find attractively valued growth companies that are also relatively low risk. QE2 is well positioned as an investment that has rapid growth potential, solid margins, the ability to harvest synergies and diversify, the opportunity to expand outside of Alberta– underpinned by the spectacular growth of Alberta’s booming economy. Fueled by a top-notch management team, QE2 is a company that should be on investor’s radar screens in the near future.
Management Team & Directors
Mihali (Mike) Belantis, CEO and Director
Mr. Belantis has more than 15 years’ experience identifying opportunities, investing and consulting for companies in both the private and public sectors. He has played a key role in developing the vision and implementing the initial foundation for many successful startups in some cases achieving market caps in excess of $300 million. As CEO, Mr. Belantis is involved in all aspects of QE2’s acquisitions, investments and new project initiatives. He also leads the team in setting the strategy and vision for the organization and articulating the road map for growth and a sustainable competitive advantage. Mr. Belantis is involved in identifying prospective targets and market opportunities; in the case of acquisitions, conducting due diligence, determining appropriate valuation and structure, developing strategy for and conducting negotiations, driving activities to closure and coordinating with other business units.
Rob Harding, CFO
Mr. Harding is a senior financial and management consultant with over 20 years of experience in start-ups through to multinational entities in the bulk highway transportation, engineering and construction and oil and gas industries. His experience includes accounting, risk management, strategic leadership, corporate finance, corporate governance, human resources and facilities management. Mr. Harding was most recently with Athabasca Oil Corporation where he held positions of Controller, Vice-President Finance & CFO and Vice-President Corporate Services where he was part of the leadership team that delivered a multi-billion dollar joint venture with Petro China, a $1.3 billion initial public offering, grew the oil sands contingent resources to over 10 billion barrels and expanded into light oil increasing production from inception to over 5,000 barrels of oil equivalent per day. Mr. Harding lived and worked internationally for over four years within the oil and gas industry with involvement in projects ranging from field operations for approximately 20,000 barrels per day production to construction and operation of multi-billion dollar LNG facilities. He received his Certified Management Accountant in 1996, a Masters of Business Administration in 2006 and recently earned the ICD.D designation as a graduate of the Institute of Corporate Directors. Mr. Harding currently serves on the board of directors and audit committee of CMA Alberta.
Fletcher Morgan, Executive Vice President
Dr. Morgan is a strategic and management consultant with over 10 years’ experience overseeing multi-million dollar projects and programs in the United Kingdom and Europe. Dr. Morgan has both a masters and a medical degree from Cambridge University, United Kingdom. His analytical work has included the US natural gas market and the North American Oil & Gas midstream service sector. In 2012, he acted as an advisor to one of the Big Six Canadian banks on commodity-related investment opportunities including LNG transportation. As Executive Vice President, Fletcher will maintain QE2’s corporate infrastructure and lead identification of new business opportunities, conducting required due diligence on potential targets and managing the acquisition process from scoping & planning to modeling & negotiations of final closing transactions. Currently, Dr. Morgan is working on completing his Certified Financial Analyst.
Douglas Bachman, Director
Mr. Bachman brings in excess of 25 years experience of Corporate Finance and Management from a Tier One Canadian Chartered Bank. During his financial career Doug has attained numerous top performance and achievement awards across Canada. Mr. Bachman has a Business Management Degree and numerous other courses including Financial Credit and Risk Analysis, Canadian Securities Certificate, and is a graduate of the University of Alberta Corporate Executive Program.
Joe Gagliardi, Director
Joe Gagliardi is a Certified Management Accountant and the Founding Partner of a successful Alberta-based recruiting firm, Recruitment Partners. Prior to his 8 years as a professional recruiter Mr. Gagliardi worked as a senior accounting professional with both private and publicly traded organizations, earning him a wide spectrum of experience in industrial manufacturing, oil and gas service companies, food processing and agriculture, where he has held roles from Controller to CFO. Mr. Gagliardi is an active volunteer in the business community, particularly as a Director on the Board of Directors for CMA Alberta and as the Chair of the Business Advisory Council for the J.R. Shaw School of Business (NAIT). As the CFO for QE2 Acquisition Corp., Mr. Gagliardi will work as a key member of the Executive Team on all strategic and tactical matters as they relate to the corporation’s finances. His focus will be in both the target and operational areas of budget management, cost benefit analysis, forecasting needs and the securing of new funding.
Robb McNaughton, Director
Mr. McNaughton has been a partner in the Securities and Capital Markets Group at the law firm Borden Ladner Gervais LLP since July 2013. From March 2010 to July 2013, Mr. McNaughton was a partner in the Corporate Finance Group at the law firm Gowling Lafleur Henderson LLP. Prior thereto, Mr. McNaughton was a lawyer and partner with Fraser Milner Casgrain LLP (currently, Dentons LLP). Mr. McNaughton worked from September 2002 to November 2003 as the Vice-President of Strategy and Corporate Operations at Assante Corporation, which was a financial services company formerly listed on the Toronto Stock Exchange that was sold to CI Financial in 2003 for approximately $850 million. Mr. McNaughton’s professional experience includes working as an operations executive at a Japanese company based in Osaka and Tokyo. Mr. McNaughton graduated from Queen’s University with a Bachelor of Arts (Honours) degree in 1991. In 2000, Mr. McNaughton received a Bachelor of Laws degree and a Master of Business Administration degree from the University of Western Ontario’s Faculty of Law and Richard Ivey School of Business.
Maria Nathanail, Lawyer & Director
Maria Nathanail has been practicing law since 2006. Her experience has helped her to develop her excellent legal, commercial and business development skills. She is currently an associate with Burstall Winger LLP in Calgary, Alberta, practicing in the areas of securities, corporate finance, mergers and acquisitions and general corporate commercial law. Prior to that, Ms. Nathanail was an associate with Torys LLP and Gowling Lafleur Henderson LLP. Ms. Nathanail obtained a Bachelor of Arts Degree in Political Science from the University of Calgary and a Juris Doctor from the University of Saskatchewan.
