Skip to main content

Caterpillar construction equipment dealer Toromont Industries Ltd. has struck a deal to buy privately held Hewitt Group for $1.02-billion in cash and stock as it seeks to ride a mining sector recovery and tap into a massive pool of public infrastructure spending planned over the next decade, particularly in Quebec.

Toromont said on Monday it will pay $917.7-million in cash and 2.25 million shares for Pointe-Claire, Que.-based Hewitt in an agreement that expands its existing business in Quebec and broadens its presence in the Atlantic provinces. It is Toromont's largest acquisition in its 56-year history.

"This is the deal we've been waiting for," National Bank analyst Maxim Sytchev said. "Toromont is buying this at a very positive inflection point on both of the end markets [in construction and mining], which drive the bulk of Hewitt's operations. So it makes a lot of sense."

Family-owned Hewitt approached Toromont looking for an exit, Concord, Ont.-based Toromont said. The rationale was to strengthen the company at a time of increasing consolidation. Hewitt is the authorized Caterpillar dealer for Quebec, Western Labrador and Atlantic Canada.

"Our customers are getting bigger and they're working in multiple territories and jurisdictions," Toromont chief executive officer Scott Medhurst said on a conference call. "They also want the benefit of consistent service and quality products from fewer and fewer suppliers."

With the agreement, Toromont adds 2,100 employees to its existing staff of 3,600 and 45 dealerships to its existing 100 locations. When the deal closes, it will have one of the biggest sales territories in the Caterpillar dealer network.

Hewitt tallied earnings before interest and taxes (EBIT) of $66.4-million last year on revenue of $1.05-billion. The 6.6-per-cent EBIT margin on its equipment business is roughly half that of Toromont's 12.4 per cent, providing an upside opportunity for the buyer, Mr. Sytchev said.

"The markets we will be entering as a result of the transaction offer significant potential for growth," Toromont chief financial officer Paul Jewer said, citing a pick up in construction and mining in Quebec especially.

He said the deal will add to earnings as soon as 2018, the combined company's first fiscal year of operations.

In March, Quebec outlined plans to spend $91-billion on infrastructure over the next 10 years as part of its annual budget exercise. The pace of contract awards slowed down during the Charbonneau Commission investigating corruption in Quebec's construction industry, but stabilized in 2014 and is now picking up. Out of $9.6-billion of capital slated to be spent this year, roads will get 22 per cent of the pie, followed by health and education, Mr. Sytchev estimates.

Toromont management said it is also enthused that Quebec recently reiterated its commitment to its northern development strategy, known as Plan Nord.

In addition, they said the company will benefit from a mining industry rebound in Quebec and elsewhere. The province has proven reserves of a number of minerals including copper, zinc, nickel and iron ore, which are all rallying in price on global markets.

"With gold flirting at a price of $1,300 per ounce, copper at almost $3 per pound and other commodity prices recovering strongly, we expect this mining industry momentum to lead many companies to revisit their plans to build mines or expand operations," Mr. Jewer said. Quebec's diversity of minerals will provide added stability to the combined company's end markets, he said.

Toromont shares gained as much as 13.5 per cent in afternoon trading to reach $50.95, their highest level on record. The market had been expecting Toromont to do something with its substantial balance sheet capacity.

The company plans to fund the acquisition with a mix of cash, shares and debt. A syndicate of lenders including Toronto Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal have committed as much as $750-million in financing to fund the deal as well as a maximum $500-million revolving working capital facility.

Toromont said it plans to launch a private placement bond offering of as much as $400-million before the deal closes and reduce the sum it draws down from the bank financing by a corresponding amount.

Follow Nicolas Van Praet on Twitter: @NickVanPraetOpens in a new window

Report an error

Editorial code of conduct

Tickers mentioned in this story

Your Globe

Build your personal news feed

Follow the author of this article:

Check Following for new articles

Interact with The Globe