Brookfield Infrastructure buys into residential services with acquisition of Enercare

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Brookfield Infrastructure Partners LP is buying Enercare Inc., the home heating and cooling company, for $3.1-billion, adding a major consumer business that fits in with its Canadian and U.S. house-building and utilities holdings.

For Enercare, the friendly deal ends a four-month examination of buyer interest with a hefty premium for its shareholders. The company had previously spurned a takeover proposal by a U.S. private-equity firm that would have offered half the value of the Brookfield transaction, although it has expanded significantly in the four years since.

Toronto-based Brookfield Infrastructure Partners (BIP), the publicly traded arm of Brookfield Asset Management, is offering $29 a share for Enercare, which rents furnaces, water heaters and air conditioners to 1.6 million residential and commercial customers in Canada and the United States. The price represents a 53-per-cent premium to Enercare’s Tuesday closing price, and a 64-per-cent gain to the weighted average since the company’s board formed a special committee in mid-March to weigh potential transactions.

Enercare shareholders can take cash or exchangeable units in BIP, up to 25 per cent of the total value of the transaction. With the assumption of Markham, Ont.-based Enercare’s debt, the deal is worth $4.3-billion.

BIP chief executive Sam Pollock said the company, which runs wholesale energy, transport and communications infrastructure businesses around the world, is attracted by Enercare’s stable cash flow and broad customer base. It was built up over the 16 years since it went public as the Consumers’ Waterheater Income Fund.

Shares in Enercare surged 53 per cent to a company high of $28.90 on the Toronto Stock Exchange on Wednesday. BIP units rose 3 per cent to $55.

Enercare’s board, led by chairman Jim Pantelidis, established a special committee on March 15 to weigh the company’s strategic options after it received an unsolicited approach, Enercare spokesman Perry Schwartz said. More details about the process will be made public in the offering circular to shareholders, he said.

Given the rich premium, and the extensive process Enercare’s special committee went through, it is doubtful a higher bid will emerge, said David Newman, analyst at Desjardins Capital Markets. A $111-million break fee in the deal would further discourage any rival suitors, he said. He recommended investors tender.

Enercare is selling out at an opportune time. Its rental business generates higher long-term returns from each unit than sales, but it takes longer to realize the returns after the initial investment by the company, Mr. Newman said. It has been successful in signing up U.S. customers to heating, ventilation and air-conditioning rental offerings, which means sizable capital investment, while at the same time proceeding with smaller acquisitions and increasing dividends.

“In one fell swoop here, Brookfield, with its deeper pockets, can fund this program,” Mr. Newman said. “[Brookfield] doesn’t have to pay the $70-million a year in dividends, and they can consolidate the fragmented U.S. market. It’s a very good solution.”

For Enercare investors, the deal compares favourably to the most recent large acquisition in the sector. Last year, Victor Li’s CKP (Canada) Holdings Ltd. bought Reliance Home Comfort, which provides similar services, for $2.8-billion. The business had a customer base of 1.7 million Canadian households. That deal was done at a price that amounted to 12.7 times trailing earnings before interest, taxes, depreciation and amortization (EBITDA), Mr. Newman said. BIP is acquiring Enercare for 14.4 times trailing EBITDA.

In 2014, the company spurned a takeover proposal from its largest shareholder, Augustus Advisors LLC, saying the $13.50-to-$15-a-share offer did not reflect the company’s full value. That year, Enercare bulked up with the $550-million takeover of Direct Energy’s Ontario home and small commercial-services business. Two years later, it paid US$340-million for Dallas-based Service Experts, representing a major expansion in the United States.

BIP’s offer must be approved by two-thirds of Enercare shareholders and is slated to close in the fourth quarter.

National Bank of Canada is Enercare’s financial adviser and Davies Ward Phillips & Vineberg LLP is its legal adviser. TD Securities, BMO Capital Markets and Bank of Nova Scotia are financial advisers to BIP and McCarthy Tétrault LLP is its legal adviser.