HEO shareholders should take the Ember deal, Desjardins says

The proposed deal that sent its stock towards the heavens today is a good one for shareholders of H2O Innovation (H2O Innovation Stock Quote, Chart, News, Analysts, Financials TSX:HEO), says Desjardins analyst Frederic Tremblay.

HEO said it had entered into a definitive agreement to be acquired by funds managed by New York-based private equity firm Ember Infrastructure Management LP.

According to the details of the arrangement, H2O shareholders will receive $4.25 per share, a 68 per cent premium to the October 2 closing share price.

The transaction, which has been approved unanimously by the board, values HEO at $395-million.

“Ember looks forward to partnering with the H2O Innovation management team to continue building a leading integrated water solutions company focused on providing best-in-class technologies and services to its customers,” said Ember managing partner Elena Savostianova. “Sustainability is core to Ember’s investment philosophy, and water and waste water solutions are central to our sustainability thesis. While H2O Innovation has achieved significant success in delivering its services and solutions to its customers both organically and through acquisition-driven growth since its inception, we see a unique opportunity for H2O Innovation to enter a new phase of growth supported by our capital and industry expertise. We intend to take a long-term view as we support the ongoing implementation of H2O Innovation’s existing strategy, while continuing to find additional opportunities to better serve its customers.”

Tremblay says this deal is unlikely to be topped.

“Could someone emerge with a higher bid during the 30-day go-shop period? Possibly, but we believe that the odds are low,” the analyst argued. “We view C$4.25/share as a fair price. The H2O transaction is one of only a few that exceeds 15x trailing EBITDA, let alone approach 20x. On a forward-looking basis, it finally positions what has long been one of our preferred names (eg HEO was a top pick in our 2023 outlook report) at a premium to the water peer group following years of its trading at a discount. Lastly, we believe the Québec angle of the deal (eg head office commitment) may be difficult to replicate for some potential buyers, especially those heavily focused on head-office cost synergies.”

In a research update to clients October 4, Tremblay moved his rating on HEO from “Buy” to “Tender” and upped his price target from $3.50 to $4.25 to reflect the bid price.