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EnerCare strikes $550-million deal, aims to silence critics

Canadian water heater company EnerCare Inc. is reuniting with a company it split from more than a decade ago in an acquisition worth more than $550-million. It's a deal that management hopes will calm restless shareholders.

EnerCare said Thursday it would buy the part of Direct Energy Marketing Ltd. focused on water heater rental, plumbing maintenance, and HVAC services, with a workforce of installation professionals and technicians. This deal reunites EnerCare's financing side of the business with Direct Energy's service business.

"We thought this deal was a good idea for some time," said John Macdonald, chief executive of EnerCare. "As a combined entity, we think we have a clearer path, stronger business case and we think we can have a much quicker responsiveness to the marketplace."

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Once known as the Consumers' Waterheater Income Fund, EnerCare has 1.1 million water heaters and other devices installed in Ontario homes and rented to owners. It also has metering contracts that measure electricity and water used in condos and apartments in Ontario, with smaller businesses in New Brunswick and other provinces.

The two companies used to both be part of Consumers Gas, which converted into Enbridge Consumers Gas in 1998. Four years later, the North American arm of British utility company Centrica acquired Enbridge Services Inc. through Direct Energy, and it spun off the Consumers' Waterheater Income Fund, which was responsible for a lot of the financing for Direct Energy's business, Mr. Macdonald said. The two are bound to work together through a multi-year agreement. In 2008, EnerCare got into the sub-metering business through acquisitions.

"Direct Energy faced the customer, and they also had the operational control. Now, we get to be customer facing and we also get the control and alignment," Mr. Macdonald said. 'In the past, it sometimes took longer to do things because the companies were split."

The deal comes just days after the company's largest shareholder, Augustus Advisors LLC, put out a letter saying it would like to lead a buyout of EnerCare on behalf of a private investment firm and had broached the subject with the company one year earlier. That deal could be worth $790-million, not including Thursday's acquisition news. Shares have climbed more than 17 per cent since that letter was circulated.

EnerCare said in a statement that Augustus had undervalued the business and said the indicated price wasn't enough to build a discussion on.

"When these offers were made to us, we were working on this transaction," Mr. Macdonald said. "We looked at the range of opportunities, but we really felt doing this transaction would add a lot of value to our shareholders."

EnerCare said favourable debt markets and a higher share price contributed to positive deal-making conditions. The company also recently improved its water-heater attrition rates, which lengthened average contracts with renters and made the business more valuable.

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The combined businesses will bring 22 per cent more cash per common share into EnerCare, which will be used to grow the business or pay a dividend to shareholders.

EnerCare will take a year to integrate its business with Direct Energy, and will then be looking at ways to improve customer experience. One example would be replacing call centres with online forms for booking maintenance appointments. This could also shave its costs.

To finance the deal, which is expected to close in the fourth quarter of the year, EnerCare sold $310-million of subscription receipts, which can be exchanged for shares when the acquisition closes. In this bought deal arrangement, National Bank Financial and TD Securities were lead underwriters. EnerCare also took on some new debt through these same banks.

EnerCare will also issue $100-million worth of common shares to Direct Energy at a price of $13 per share in a private placement that guarantees Direct Energy's involvement in the business for at least 18 months. Direct Energy will also get a seat on EnerCare's board.

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More


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