Q&A on Navigation Capital’s Smart Grid Roll-Up

Navigation Capital, a lower mid-market firm based in Atlanta, today acquired the first of what it hopes to be a handful of smart grid infrastructure services companies. The firm purchased Specialized Technical Services for an all-equity deal value in the range of $15 million to $30 million. Navigation Capital hopes to add several more companies to the platform, bringing STS to between $100 million and $200 million in revenue in three years.

The firm used capital from its fourth fund, which, after eight deals over the past year, is 80% deployed. Navigation will likely return to market this year with a new fund targeting $150 million to $250 million in commitments.

I spoke with Managing Partner and Co-Founder Larry Mock about building an industry leader in a fragmented market, turning owners into sellers, a “tsunami of demand” and ever-expanding pies.

peHUB: How did you find this company and why did you decide to focus on the smart meter industry?

Larry Mock: It was several things that came together. We met Rob Shively, who has extensive managing businesses similar to what we bought but much bigger. He was recommended to us by some mutual contacts, so we talked through the idea and ended up bringing him on as an Executive-in-Residence. So, we had the right guy. Then we looked at the intelligent infrastructure space which is very broad, it includes everything from power plants to telephone companies, and we saw, particularly in the electric area, a win-win-win situation. It’s a win for the consumers because their electric costs go down with smart meters. And since they’re also cutting down on their peak usage, which is the easiest place to cut, the power generators don’t need to build new peak plants. Those things are phenomenally expensive, so it’s a win for the power plants. And from a governmental basis, it is environmentally friendly to use less energy so there’s less pollution. So all of the constituencies involved benefit. That’s unusual because sometimes you get a piece of a pie, and if you want your piece to be bigger, it comes at someone else’s expense. In this case it was an ever-expanding pie.

When we drilled down further into the smart meter market, we saw that there were 140 million electric meters in the US. This is a huge market, and only 88 million of those have been upgraded to smart meters.

Are there competitors in this market?

That was the other interesting thing we discovered. We’re a low-to-middle market buyout firm. When we go into a sector, there tends to be very big competitors. There are none(in the smart meter industry). It’s very fragmented and we would expect when we get to the scale we expect to get to we will be the largest player in the market. It’s very unusual to have the opportunity to build an industry leader. We tend to build “challenger brands.” In this category there are really no major players.

So you plan to consolidate?

Yes. We expect to have an announcement in 60 to 90 days for at least one deal. We’re quite far along with a few companies. The business plan to get the company as close to $200 million in revenues as we can. To do that, we think we need two to four acquisitions.

What are the margins like in this industry?

Well, we are buying well-run companies. We’ve looked at 20 potential acquisitions in this smart grid category and the margins run from 5% to 35%. We’re buying the better companies so they are running from 15% to 30%. I think there’s a tsunami of demand for smart meter installation rolling across the landscape.

Are those margins sustainable, even after everyone gets a smart meter?

We think their margins are sustainable because the value-added players are able to go in and help their customers, the big utilities, to save enough money to pay for the installation. In replacing meters, you find a lot of meters that are installed incorrectly and can pay for the program out of the saving you get from installing it properly and getting additional revenue. Our installers tend to be a higher grade of individual employee than the most companies.

What’s a typical deal multiple for a high quality company in this space?

On a company this size in today’s PE market with the constraints on debt that exist, the multiples are between 4x and 7x.

Are there a lot of sellers out there?

We’ve looked at 20 companies and what we’re doing is a little different than what you might generally be accustomed to. We are approaching owners, not sellers. We’re trying to covert owners into sellers. In some cases we’re converting owners into partners. (We bought 100% of STS.) We approached STS and it was not for sale and we convinced them it was a good time to sell. What we found at the beginning of 2009 was that most owners though it was a bad time to sell. We decided if we were going to do some deals we needed to be proactive. We ended up doing eight deals in 2009 and three were brand new platforms for us.

I imagine your fund is getting close to being fully deployed.

We used Navigation Capital Partners IV LP, which is a $125 million fund. It’s probably 80% deployed now.

Will you be raising a new fund?

We expect to be in the market sometime this year.

Will your fund size increase?

Not necessarily, we expect it to be between $150 million and $250 million.