Not all roll-ups are created equal, and not all are out of favour

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The "roll-up" appears to be on the ropes.

A number of former all-stars – Valeant Pharmaceuticals International Inc., Concordia Healthcare Corp., Amaya Inc. and Intertain Group Ltd. – have fallen from grace over the past nine months or so, with their multiyear mergers and acquisitions (M&A) streaks on hold and their stock prices in the dumps. And never mind trying to make acquisitions: Some are trying to sell themselves.

"Right now, roll-ups are out of favour," said John Medland, partner with Blair Franklin Capital Partners Inc., a Toronto-based boutique M&A advisory firm. "People are probably less open to this kind of momentum story, because they've seen some recent examples of where it didn't work out."

A classic roll-up starts off small and makes an "accretive" acquisition. Its appreciating share prices then give it the currency to do another deal. Valeant was the poster child in health care, Amaya Inc. in online gambling. Each spawned a junior version of themselves. (Concordia and Intertain respectively.)

Toronto hedge-fund manager Jason Donville, chief executive officer of Donville Kent Asset Management Inc., has taken his licks on a few Canadian roll-ups since late last year, including Concordia, but he's in no mood to categorically bash the model. And he's not even a big fan of the word "roll-up" to begin with.

"Roll-up is a derogatory term," he said. "Anybody who grows by acquisition – if people don't like them – they call them a roll-up."

He has a point: "Intertain is another speculative Canadian roll-up, but in our opinion the worst of its kind," New York-based short-seller Bex Axler wrote in a blistering report last year that caused the online gambling company to plummet in price.

Mr. Donville says there's plenty to like about the "growth by acquisition" model, as he prefers to call it. Berkshire Hathaway Inc. and Fairfax Financial Holdings Ltd. – two companies run by world-class investors – technically qualify as roll-ups, he points out.

Whatever you call them, the model isn't a new phenomenon. The mining sector spawned many successful roll-ups, including Barrick Gold Corp. In the technology sector, Nortel Networks Corp. was considered a roll-up. Not all roll-ups are created equal, and not all are out of favour either.

"There's a number of great Canadian examples [of roll-ups] that aren't as aggressive on the capital structure and aren't as frequent acquirers," Blair Franklin's Mr. Medland said.

He points to Fortis Inc., Emera Inc. and Park Lawn Corp. as roll-ups that aren't particularly "flashy," that make "one or two acquisitions a year, or maybe every two years," that integrate their acquisitions well and create shareholder value over the long term.

Mr. Donville says Alimentation Couche-Tard Inc., MTY Food Group and Premium Brands Inc. are roll-ups that get the job done.

The key to a successful roll-up is not to get in over your head when it comes to debt.

And while Valeant is fresh in people's minds as a cautionary tale, every era has its example of a roll-up gone bad.

LaidLaw Inc., a major consolidator in the bus market in the 1990s – buying 38 companies in 1997 alone – had the ignominy of being both a poor operator and becoming way overleveraged. It collapsed in 2001 amid a $4.6-billion (U.S.) debt load.