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Provincial Aerospace purchase gives boost to Exchange Income Corp.

“Investors are getting excited about this story again,” said Trevor Johnson, an analyst with National Financial Bank, adding that investors are once again taking notice of EIC.

He predicted that the purchase of PAL should increase earnings per share by about 30 per cent year next year, and provide investors in EIC with a “nice yield” on their dividends.

He has set a target for shares at $25, up about $3 from the current price.

Not long ago, Johnson had little hope for EIC. The company had purchased a communications tower company called Westower, and landed a major contract with telecommunications giant AT&T in the United States.

It didn’t go well, said Johnson, and it “ruined their margins.”

But the company was able to sell its U.S. division of Westower for $200 million, and even made a tidy profit on the sale.

The company has redirected that capital very quickly into the acquisition of PAL, and investors are “back onside with this story,” said Johnson.

EIC also reported very strong third-quarter results this week, increasing its dividend to investors by four per cent. 

“This is a very good sign that the market should feel good about the cash flows being generated by the business going forward,” Johnson added.

EIC is an acquisition-oriented Winnipeg-based company that owns regional airlines and several manufacturing companies, with operations primarily in Manitoba, Ontario and Nunavut.

The company has been traded on the Toronto Stock Exchange (TSX) since 2004, and now has annual revenues in excess of $1 billion. The company operated as an income trust until July 2009.

Its purchase of PAL for a combination of cash and stock worth about $246 million is the largest deal in its history, and for the first time gives it a presence in eastern Canada.

The CEO for EIC, Mike Pyle, told CBC News he considers hundreds of deals every year, but was especially intrigued by the prospect of acquiring PAL, an integrated aerospace and defence company with some 900 employees — mostly in Newfoundland and Labrador — and annual revenues of $185 million.

“I’m not sure I’ve seen a deal with a better labour pool, better staff and in particular a senior management team, so for us it was a perfect fit,” Pyle said in an interview.

One of its PAL’s subsidiaries is Provincial Airlines, considered the largest regional airline in eastern Canada, with 30-plus aircraft. PAL is also considered a global leader in maritime surveillance, with patrol aircraft in Canada, the Caribbean and the Middle East.

Pyle said he could not find any downsides to the deal, which is subject to regulatory approval and is expected to close late this year or early in 2015.

PAL’s airline business and fixed-base operations are similar to those already owned by EIC, but the aerospace division is a new source of revenue.

Pyle sees great potential for growth in the maritime surveillance sector, and said EIC “brings a balance sheet behind them to be able to attack those opportunities and really participate in a meaningful way.”

The purchase was greeted with unanimous approval by senior officials with PAL and government leaders in the province.

According to its website, EIC invests in profitable, well-established companies with strong cash flows operating in distinct segments of a market.

The company owns 10 subsidiaries in three niche business segments — aviation, metal manufacturing and infrastructure services.

These subsidiaries operate autonomously and maintain their identities, said Pyle, adding that the corporation’s head office is staffed by just 12 people.

“We rely on the people in the subsidiaries to run them,” he said. “The key operating decisions are made by the people in the companies we buy.”

Based on the company’s track record, Johnson said front-line and back office employees with PAL won’t notice much of a difference in their operations.

“Their MO (method of operation) is to focus on growing its portfolio of companies; not so much the company,” said Johnson. “They leave that in the hands of the entrepreneurs.”

In the aviation sector, EIC owns companies such as Calm Air, Perimeter Aviation, Bearskin Airlines, Keewatin Air and Custom Helicopters. These provide scheduled airline service and emergency medical services to communities in Manitoba, Ontario and Nunavut, including First Nations communities, using both fixed and rotary wing aircraft. 

In 2013, the company purchased a company called Regional One, which provides after-market aircraft engines and parts and refurbishes airplanes nearing the end of their lifespan.

The purchase price was $80 million, and was described as the largest deal in the company’s history to that point.

Johnson said Regional One was also one of the company’s best acquisitions, and will nicely complement PAL.

“(Regional One) helped them get comfort in the fact they can really leverage their footprint, get a little more exposure into the aviation space, and make a bigger size acquisition like PAL,” Johnson stated.

The company also opened a $10-million aircraft maintenance facility in Winnipeg last year.

EIC’s four manufacturing subsidiaries specialize in the design and fabrication of metal products such as stainless steel tanks and processing equipment, specialized pressure washing and steam systems, sheet metal and tubular products, and custom tanks for the transport of oil, gas, water and sewer.

These products are sold in Canada and the United States.

“We don’t buy damaged companies,” Pyle said. “We buy strong performing companies and then hopefully give a little extra access to capital and those kinds of things to enable them to grow perhaps a little faster than they could under private ownership.”

Pyle said the corporation’s mantra is to never change the culture of a successful company.

“People are always worried when a company is acquired that somehow we are going to create value by making it smaller. Our strategy is quite the opposite. We’re going to create value by making it bigger,” he said.

“We see further investment in Newfoundland and additional employees in Newfoundland,” he added.