The acquisition of Hewitt Equipment by Toromont Industries is the largest deal between Caterpillar dealers in the manufacturer’s history.
On Aug. 28, Toromont announced it’s purchasing the Quebec-based Caterpillar dealer for more than $1 billion.
“The announcement represents our most significant development yet, given its size, potential for profit contribution and opportunity for delivering organic growth in the years to come,” Scott Medhurst, Toromont president and CEO, said during a conference call. “We believe this transaction has the potential to be transformative for Toromont, and our results going forward.”
Toromont Cat grows by 45 branches
The acquisition will see Toromont’s network of dealerships grow by 45 branches and 2,000 employees in Quebec and the Maritimes. When the deal is finalized, Toromont will operate 120 Cat dealerships throughout Nunavut, Manitoba, Ontario, Québec, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland & Labrador.
“This expanded presence makes us one of Caterpillar’s largest dealers, both from a financial and geographic perspective,” said Paul Jewer, Toromont’s executive vice president and chief financial officer. “That’s a lot of ground to cover.”
Although the transactions size is significant, Medhurst noted the two companies share numerous traits and values, including strong relationships with Caterpillar and their customers, a commitment to growth and advancement for employees.
“These common values will make the integration for both companies as seamless as possible,” Medhurst said.
Hewitt Equipment, a private company, is the authorized Caterpillar dealer for the province of Québec, Western Labrador and the Maritimes, as well as the Caterpillar lift truck dealer for most of Ontario. Hewitt is also the MaK dealer for Québec, the Maritimes and the Eastern seaboard of the United States, from Maine to Virginia.
Headquartered in Pointe-Claire, Que., Hewitt sells, rents and services the full line of Caterpillar and other products through its six operating business entities: Hewitt Equipment, Atlantic Tractors, Location Hewitt/Hewitt Rentals, Hewitt Material Handling, Montréal Hydraulique and SITECH QM.
“For more than 65 years, the Hewitt Group has been at the centre of the resource and construction industries in Quebec and the Maritimes, helping to get roads, dams and mines built and running,” said Jim Hewitt, chairman and CEO of the company.
With the trend towards consolidation throughout the various sectors of heavy equipment, Hewitt decided the timing was right to sell the company.
“Jim felt the timing was right. He approached us for a dialogue and we were excited to engage with him on the process. We were thrilled Caterpillar was very supportive of that,” Medhurst said. “The Hewitt family has built a world class organization with a strong reputation for quality service amongst its customers. We are privileged to be taking on the stewardship of this excellent business and building on the family legacy.”
By the numbers
Toromont will fund the acquisition through current cash on hand, unsecured debt financing of up to $750 million and the issuance of 2.25 million Toromont shares, valued at $100 million, based on the 10-day average share price prior to the announcement. A syndicate of financial institutions has provided Toromont with committed financing of up to $750 million to fund the purchase of Hewitt and a revolving working capital facility of up to $500 million.
Prior to closure of the deal, Toromont plans to launch a private placement bond offering of up to $400 million to reduce the draw on the bank financing. The transaction is expected to close by mid-October, depending on the timing of certain regulatory consents, including TSX approval and customary closing conditions.
Assets vs debt
Jewer noted the transaction would not be possible without the strength of Toromont’s balance sheet. The company currently holds more than $1.5 billion of assets and $31 million in long-term debt.
“Even with the financing required for the acquisition, Toromont will have a debt to capital ratio of approximately 30 per cent by the end of 2018,” Jewer said. “The transaction is the largest in our history, but I don’t think that paints the full picture of the size of this deal.”
In 2016, Hewitt generated revenue of more than $1 billion, and operating profit of $66.4 million and net earnings of $46.6 million. Heavy equipment represents 65 per cent of the company’s revenue. In addition, energy accounted for 12 per cent of revenue followed by material handling at 11 per cent.
“Regular followers of Toromont will notice a similar pattern of revenue streams,” Jewer said.
By product line, parts were responsible for 36 per cent of Hewitt’s sales, followed by new machines holding 32 per cent of the company’s sales.
“The value of the transaction is a testament to both companies. For Hewitt, it reflects the success, growth and steady performance it has been able to achieve over its 65-year history,” Jewer said. “For Toromont, it confirms our business model and our ability to deliver strong results, even against major headwinds of the past several years.”
Toromont plans to maintain and invest in existing Hewitt facilities. Under its decentralized business model, regional leadership will continue to run their businesses, allowing local decisions based on the interests of their customer base.
“Each of these branch’s employees will be key members of the Toromont family, once we close the transaction,” Medhurst said. “We intend to cross pollinate best practices from the two companies once the transaction closes.”