Rebounding Garda back in acquisition mode

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Nearly four years after his company had a near-death experience, Garda World Security Corp. chief executive officer Stéphan Crétier is sounding his usual self: cheerful, confident – and cavalier.

"People don't really appreciate how we're performing so well," the founder and largest shareholder of Canada's biggest cash-handling and security firm said in a recent interview.

"We've been able to turn around the company completely."

For a brief period in the mid-2000s, Montreal-based Garda was an investor darling. After a decade of successfully buying small companies to become Canada's largest security and cash-handling business, Mr. Crétier, a former professional umpire, amped things up, taking Garda on a debt-fuelled acquisition frenzy.

It gobbled up 18 companies over a 16-month period – capped off by paying $391-million for California-based ATI Systems International in February, 2007 – and emerged a global player with the second-largest cash-handling firm in the United States, behind Brink's Inc.

But within months, the ATI deal turned sour. Garda sued former ATI chief executive Richard Irvin for allegedly misrepresenting ATI's financial affairs and inflating the purchase price. He, in turn, sued Garda for wrongful dismissal; Mr. Irvin's case was settled out of court in 2010, while Garda's lawsuit grinds on.

"We have done more than 30 acquisitions and you could say we [erred] once," Mr. Cretier said. "A judgment in court will tell us if we were completely misled."

The troubles with ATI could not have come at a worse time. On Sept. 15, 2008 – the day Lehman Brothers Inc. filed for bankruptcy protection – Garda reported disappointing quarterly earnings that violated terms of its loan agreements. Its stock plummeted; in three months, it was trading for 60 cents, down from $10 before the meltdown. Most analysts dropped coverage; Garda's lenders tightened the leash and investors fled.

"He kept reassuring us everything was fine when in fact the acquisition wasn't working out," said Sebastian van Berkom, a Montreal fund manager who oversees $1.8-billion in small-cap assets. He sold his entire Garda stake after the bad news hit. "We lost confidence in him, and the debt was way too high."

"I said, 'Forget the investors, forget the banks' – they were playing darts with my picture," Mr. Crétier recalled. He sold two businesses at a loss for $92-million, but his remaining operations continued to perform well.

Garda restructured its debt, pushing out the repayment on most of its principal past 2017. The stock rebounded but has remained between $7 and $10 since 2009.

Garda is gaining market share in the U.S. cash-handling business and earned a record $35.5-million in operating earnings – an increase of 20 per cent year over year – on revenue of $320.5-million in its first quarter ended Apr. 30.

"Their operations are going well, they're growing market share, revenues are increasing, and the valuation doesn't fully reflect [that]," said GMP Securities analyst Martin Landry.

While Garda's debt has risen five quarters in a row, and is at a three-year high of $639-million, Mr. Crétier has returned to his acquisitive ways. Garda bought four businesses last year for $25.2-million, and has picked up at least five more for another $14.2-million this year, including a recent deal for Quebec City-based McKinnon Services.

Mr. Cretier said the latest deals are small, "tuck-in" acquisitions that are immediately boosting earnings, adding that Garda's main success has been from winning new business from its existing operations, particularly in emerging markets.

Mr. Landry said the key measure of Garda's health – its ratio of debt to operating earnings – has fallen to 4.3 from 5.5 during the crisis. When that number drops to three, which he figures will happen by the summer of 2014, "I think they'll draw in a much larger pool of investors."

For now, he said, "I want to see the debt go down."

Mr. van Berkom believes the market will forgive Mr. Crétier if he pays down his debt. "The stock is range-bound until he solves that."