Little bus company, big takeover target
U. S., GLOBAL SUITORS COME CALLING TO B.C.
It’s the little bus company that could. Grande West Transportation Group Inc. has shoved aside bigger rivals including Volvo Group’s Nova Bus to win just about every tender that it’s competed for since introducing a smaller, China-assembled bus to Canada’s public transit systems in 2013. This year, it forecasts deliveries will surge sixfold as it expands into the US$2.3 billion market to supply U.S. transit agencies — a move that’s setting it up to become an acquisition target.
“We’re a proper takeout target at this point as we continue to win more business,” said John LaGourgue, a director at the Aldergrove, British Columbia- based company near Vancouver, who oversees its capital markets strategy. The company has already been approached by potential U. S. suitors and “a lot of overseas groups would like to have access to the U. S. market,” LaGourgue said, declining to elaborate on which companies.
Grande West might be an attractive acquisition for larger bus rivals facing slow growth in the mature North American bus industry, said Amr Ezzat, a Montrealbased analyst at Echelon Wealth Partners Inc., one of just two analysts who cover the company. It’d also appeal to global players seeking a foothold in the U.S., including its Chinese partner Weichai Group, said Beacon Securities analyst Ahmad Shaath.
The company “snuck in from a blind spot,” capitalizing on a market opening ignored by incumbents, Shaath said in a January note after initiating coverage. “Grande West is on the cusp of establishing a foothold in an industry with high barriers to entry, which makes it a great investment opportunity.”
That opportunity arose in 2008 when BC Transit sought to procure mid-sized buses after realizing that it was losing money on passengers on its fleet of mostly traditional 40- foot buses — in some cases as much as $10 a ride. The agency received zero expressions of interest from industry incumbents including Nova Bus and Winnipeg-based New Flyer Industries Inc.
Enter Grande West chief executive office William Trainer, who partnered with the provincial agency to build a smaller, sturdier and cheaper bus from scratch. The company designed a lighter shell but paired it with standardized components favoured by transit agencies, such as a Cummins Inc. engine. The smallest 27.5-foot model seats 23 passengers, compared with a traditional 40-seat bus.
Turned down by North American bus manufacturers — including Nova, New Flyer and REV Group Inc.’s ElDorado unit — it struck a deal with China’s Weichai Group to produce the vehicles in Yangzhou. Over the next five years, it built, tested and obtained safety certifications for its new Vicinity bus, delivering the first 15 to BC Transit in 2013 after demonstrating it at the 2010 Winter Olympics in Vancouver.
It has since won orders in eight provinces and last month won its first order from a U. S. public transit agency. More than 40 Canadian cities have bought its buses, including Calgary, Edmonton, Regina and Saskatoon, according to a March 28 investor presentation.
“Now we’ve got this amazing moat around our business because it’s kind of too late for anybody to build a mid- sized bus,” said LaGourgue. “We’ve already got it. By the time anyone else comes out with one, we’ll be in all the transit agencies.”
Grande West expects to announce its first profit when it reports first-quarter results by early May, said LaGourgue. After delivering 31 buses in 2016, it expects to deliver more than 200 this year and to double that again in 2018.
Investors have taken note, driving up the stock more than fivefold since its initial public offering price of just 50 cents a share in 2013. Grande West surged 8.4 per cent to $ 2.96 in afternoon trading in Toronto, giving it a market value of $174.3 million.
The sector isn’ t without its risks. Annual spending by U. S. transit agencies is volatile, having swung between US$1.4 billion to US$3.1 billion over the last two decades, according to an October report by the Mineta Transportation Institute. Companies have gone bankrupt, left the market, or been acquired by competitors, leaving only a handful of major manufacturers: Nova, New Flyer, ElDorado, and Gilig based in Hayward, California.
Grande West has an edge with cash-strapped public transit agencies. The Vicinity, compared to a similarly sized ElDorado bus, costs about a third less to buy, 20 per cent less to maintain, and saves as much as 35 per cent on fuel, according to the March investor presentation.
“The bus that you are comparing our bus to is a fully imported diesel bus from China, it is cheap, and not made in North America,” Sandy Bugbee, treasurer and vice president of investor relations for ElDorado’s parent REV Group, said in an email.
Other manufacturers may offer 30-foot buses “but they just cut 10 feet out of the middle, and it costs the same as the traditional 40-foot bus,” LaGourgue says.
The company is also in the final phases of designing electric and hybrid buses so they don’t lose out to competitors offering those options, said Ezzat.
In March, Grande West announced a manufacturing deal with one of the largest U. S. retail bus sellers, Alliance Bus Group, to make buses at a plant in Atlanta that will meet “Buy America” requirements favoured by President Donald Trump, and would qualify for federally funded procurement requests.
“We expect the Vicinity to gain traction in the U. S. transit market,” says Ezzat, who has raised the stock’s target price five times since the start of 2016.
“We can’ t make t hem f ast enough right now,” LaGourgue said. “Once you’re accepted, it just snowballs.”