In recent months, we have advised a host of utility services companies, including Qualus Power Services, a leading provider of outsourced technical services for utility and power grid substations and infrastructure. Other recent utility services transactions have involved ADB Companies; North American Substation Services (NASS) and Electric Power Systems (EPS); and Feeney Utility Services Group.
Here, Harris Williams Managing Directors Drew Spitzer and Matt White discuss buyer interest in utility services and what made Qualus a standout target.
What makes this an appealing space?
White: Outsourced technical services for utility and power grid substations and infrastructure are attracting considerable investor interest because of their resilience and growth. These assets are critical to the delivery of reliable power, and they require significant, nondiscretionary maintenance and repairs.
Spitzer: The U.S. power grid is aging and changing. Commercial, industrial, and government (“CIG”) electrical power equipment will require critical investments in grid resiliency to mitigate failure rates and outages. Renewables are becoming a bigger part of the mix, which will also drive incremental spending. And regulatory requirements are becoming more stringent, which also increases spending.
White: The shift toward automation and digitization of the grid is another factor, increasing the demand for equipment upgrades. And the greater focus on renewable distributed energy is pushing utilities to update their infrastructure and their workforces.
Spitzer: All of that change is driving growth and innovation, which sparks interest in this space from big funds. We saw that two years ago when we sold Shermco to Gryphon Investors. Since then, we’ve seen only more momentum in terms of interest in the sector. In addition to Qualus and Shermco, we have advised several other innovative companies in the space on both buy- and sell-side strategies.
There's now a supply and demand imbalance between investors looking to deploy capital behind this utility infrastructure theme and actual assets of scale to invest in. So, when one becomes available, you get strong interest.
What makes Qualus an especially attractive company?
White: Qualus’s significant competitive advantage in the outsourced power services market is due to the breadth of its capabilities. Customers prefer to consolidate vendor spending, which favors multiservice providers and gives them access to highly recurring revenue. The majority of Qualus’s revenue is from the upgrade, expansion, or maintenance of existing power infrastructure, rather than greenfield opportunities.
Spitzer: Qualus also has a proven track record of strategic acquisitions, which positions the company as an acquirer-of-choice within a highly fragmented industry. It has successfully completed five add-on acquisitions, including the transformational Power Grid Engineering acquisition in 2018, which meaningfully expanded its Protection & Control (P&C) capabilities and added to its end-to-end service offering.
In short, Qualus has demonstrated strong, consistent organic and acquisition growth, with the opportunity to build on its foundation.
What’s our advice for other buyers?
White: The same themes that benefit Qualus are at play in other utility service investments. Aging infrastructure, double-digit growth, outsourcing trends, specialized labor, and through-cycle/recurring revenue are all prevalent to some extent within those businesses.
Spitzer: We continue to add to our experience across the broader utility services landscape, a track record that includes PowerTeam, Osmose, and Nesco twice, and USIC three times. We’ve also advised Shermco, Peak Utility Services and Solomon, among others. That’s everything from rental providers to Test, Inspection, Certifications & Compliance (TICC) companies to maintenance and service firms. The benefit of working with industry leading platforms like these is that we see how the market is evolving and the key themes that resonate with investment committees.
We are also seeing some industry participants grow into multiservice platforms. We’re currently advising a business that provides gas, electric, substation, and other services under one umbrella. Peak Utility Services is another example with its platform of gas, electric, and telecom services. There’s a wide waterfront of outsourced services supporting utility infrastructure, creating attractive opportunities for investors.
White: The sector is generating continued momentum. You have big funds buying smaller platforms and putting a lot of capital behind them, as in the case of New Mountain acquiring Qualus. But we’re also seeing smaller funds participating in smaller deals, and bigger funds participating in bigger deals, so the landscape is really made up of players of different sizes. Overall, the space provides a rich variety of opportunities for an equally diverse range of players.
For more information, please contact our senior bankers.
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