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International Update

By Roger S. Conrad on Sep. 11, 2014

The biggest news from the quarter involved EnerCare (TSX: ECI, OTC: CSUWF), which announced the CA$550 million acquisition of Centrica’s (LSE: CNA, OTC: CPYYY) Ontario-based water heater rental, plumbing maintenance and HVAC services businesses.

This purchase reunites two businesses that, before May 2002, operated as a unit of Enbridge (TSX: ENB, NYSE: ENB). Consumers Waterheater Income Fund, EnerCare’s predecessor, bought Enbridge’s water-heater rental business, while Centrica subsidiary Direct Energy took over the Canadian home and business services operations.

This deal expands EnerCare’s core business significantly and offers considerable synergies. Management expects the acquisition to bolster its cash flow by 25 percent in the first year after the close.

EnerCare has already reached a deal to fund the equity portion of the purchase, selling 23.847 million subscription receipts that holders can exchange for common stock when the deal closes. The CA$333 million that the firm netted from the sale of these securities reduces the financial risk associated with the acquisition.

EnerCare unveiled this proposed transaction days after August Advisors LLC, which owns an 11.67 percent in the company, expressed an interest in having one of its affiliates take the company private.

A successful takeover bid would need to be well north of CA$13.50 to CA$15, the range in which the stock traded last summer.

We’re agnostic about whether the rumored takeover bid materializes; the company continues to deliver the goods and has ample opportunity to grow as a freestanding entity.

Case in Point: EnerCare posted solid second-quarter results, growing its cash flow by 10 percent year over year. The company’s payout ratio also improved to 45 percent, while customer acquisitions offset attrition by a 1.7-to-1 margin.

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