DBRS Confirms Toromont Industries Ltd. Ratings at BBB (high) with Stable Trends Following Announced Acquisition of Hewitt Group of Companies

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with Stable trends following the Company’s announcement that it has agreed to acquire the businesses and net operating assets of the Hewitt Group of companies (Hewitt) in exchange for $917.7 million in cash consideration and $100 million in common shares of Toromont (based on the ten-day average share price as at signing) (the Acquisition or Transaction). Toromont has indicated that it will use a combination of cash on hand and unsecured debt financing of up to $750 million to fund the Acquisition. The Transaction is expected to close by mid-October, subject to the timing of certain regulatory approvals. The rating action reflects DBRS’s opinion that the Acquisition, upon completion, will meaningfully strengthen Toromont’s business risk profile; the pro forma financial risk profile is projected to remain at a level commensurate with the current rating despite being weakened by the marked increase in leverage.

Hewitt is an exclusive equipment dealer of Caterpillar Inc. (CAT, rated “A,” Stable by DBRS) in the province of Québec and Western Labrador, and through its wholly owned subsidiary, Atlantic Tractors & Equipment Limited, in New Brunswick, Nova Scotia and Prince Edward Island. Founded in 1952, Hewitt has 45 branches across Eastern Canada and employs more than 2,000 people. In 2016, Hewitt generated sales of $1.0 billion and EBITDA of roughly $126 million.

Hewitt’s leading market position in Québec provides significant growth potential for Toromont, as the robust natural resource extraction sector and increasing infrastructure spending in the province bode well for heavy equipment sales. Toromont will also gain some geographic diversification benefits through Hewitt’s coverage of the Maritime provinces, whose economic drivers include shipbuilding, oil and gas, and forestry. The Acquisition should bolster Toromont’s ongoing progress in improving its revenue mix, given that Hewitt historically generated a higher proportion of revenue from the higher-margin and less volatile product support services. Moreover, the Acquisition will expand Toromont’s product offerings to include Mitsubishi Caterpillar forklifts and Maschinenbau Kiel GmbH (MaK) marine engines, as well as Caterpillar industrial engine products under the Perkins, Electro-Motive Diesel and MWM brands. DBRS believes that the Acquisition will considerably increase Toromont’s scale, providing significant opportunities for revenue and cost synergies.

Toromont’s operating performance in 2016 and through the first six months of 2017 continued to improve vis-à-vis the previous year, reflecting strong earnings generation from both the Equipment Group and the CIMCO Refrigeration business. The credit metrics as at June 30, 2017, remained at a level exceeding the current rating. DBRS estimates Toromont’s pro forma lease-adjusted debt-to-capital ratio to have increased from 15% to 45% as of June 30, 2017 (based on LTM June 2017 results of Toromont and 2016 full-year results of Hewitt). Toromont’s lease-adjusted debt-to-EBITDA ratio is estimated to rise to 2.18 times (x) from 0.55x, and lease-adjusted cash flow-to-debt ratio is estimated to decrease to 0.33x from 1.33x. While Toromont’s pro forma financial risk profile is still adequate for the current rating, it leaves the Company with very little cushion to absorb any unexpected deterioration in operating performance.

Toromont has stated that it will maintain existing facilities and, under its decentralized business model, regional leadership will continue to run their businesses locally. Although DBRS sees limited integration risk associated with the Acquisition, considering Toromont’s extensive experience and proven expertise in effectively managing CAT dealership, any material disruption in operations post-acquisition could lead to a negative rating action. DBRS does not foresee any positive rating actions in the near term as Toromont’s credit metrics will remain constrained by the relatively high debt levels.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Capital Goods Dealership Industry, which can be found on dbrs.com under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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