M&A Outlook Discussed at Strategies in Light Investor Forum

Dan Coyne.pngStrategies in Light is home to some of the best and most candid, high-level discussions in our industry.   Dan Coyne, Senior Managing Director and Head of U.S. Investment Banking at Canaccord Genuity Inc. spoke this year on a variety of topics. My notes are below

  • Upstream lighting (components such as chips and drivers) are nearing full commoditization with low profit margins
  • The future of Lighting is about value delivered and connectivity
  • There is a lot of interest in Connected commerce, but not sure a successful model has been nailed. Once the industry can prove improved sales per square foot, industry will take off.
  • There were two notable deals last year.  Current, by GE’s acquisition of Daintree. (some think around a $77M deal) and Verizon’s acquisition of Sensity Systems.   Speculation that a key driver for Verizon was the ability to integrate 5G technology with Sensity’s  IoT platform and use streetlights as wireless bases. Verizon has been the most aggressive of technology leaders. 
  • Still sees a significant runway as market shifts toward future of lighting with many opportunities still valuable for upgrade, retrofits and new deployments of digital solutions including LED Lighting and Controls.
  • Cree and Acuity have two different models, but are both pure plays in lighting.  Since 2014 the stock prices of both companies have gone in opposing directions. Cree’s chip business has good margins, but replacement has been a bit of a drag.  Wall Street wants to understand gross margins.  Companies like Acuity and Lumenpulse can push at 40% plus margins.  Wall Street views companies with less than 30% just as contract manufacturers. 
  • To gain suitors, a company needs to have at least $10M in EBITDA and trying to get to $30M, but $10M EBITDA gets a lot of attention. 

After Dan’s talk, he joined a panel discussion with

  • Jason Rosenfeld,Equity Research Associate, Canaccord Genuity
  • Konrad Jarausch, Entrepreneur in Residence, Capricorn Investment Group
  • John Quealy, Managing Director, Canaccord Genuity
  • Jed Dorsheimer, Vice President Strategic Vertical Marketing, Commercial Office, Acuity Brands

Below are my notes from the panel discussion:

  • In lighting, too many people touch product from the design process to installation.
  • Exit strategy is broadening.  One of the likely targets for an exit is to sell to one of the larger Asian conglomerates.  They make good LEDs but don’t have much access to the North America traditional lighting channels. Haven’t seen that yet.  How do we go forward with the Asian buyers?   Another panelist said China M&A should have accelerated, but it has just stopped!  Capital controls and fear of a massive import tax have caused this. 
  • Waiting to hear from Apple and Google. Not sure what keeps these guys on the sidelines.  Also haven’t seen a lot of activity from Lutron, Honeywell and Johnson Controls. Think there may be opportunities for them to acquire lighting IoT companies. 
  • M&A is core to Acuity’s DNA.  After all, Acuity is an amalgamation of various companies.   A few years ago, Acuity’s share price was $34 and they went on a long execution and stock price went up to $280 and today it is in the  $220 range. Acuity has been very aggressive with acquisitions such as Sensor Switch and Bytelight.
  • Horticulture is an evolving market for lighting (we saw two Horticulture displays in the exhibit hall) 
  • GE is really focused on service now.
  • Disruption is happening at the utility level.   The winners will be whoever owns the End User relationship.  Disruption can occur by whoever owns the relationship, but every time someone tries to disrupt the channel, the channel has bitten back—too many jobs at risk.  Cree tried to disrupt the channel by circumventing it.  As market moved from high power to mid-power it blew up that strategy.
  • If this is a big data market, where is IBM and Watson?  Think there might be more interest from IBM than from Google because of the big data opportunity.
  • Never been a close-based technology that has beet an open-based technology. 

Your humble editor asked the panel about Lighting as a Serivce (LaaS) and why we haven’t seen more.

  • No, not as successful as we thought, but there are a lot of, sale-leasebacks and those are real and there are a bunch of new firms that are getting good returns. The Solar and Wind model helped pave the way for this model.   People can earn 8% to 11% returns, and they are risk free.  It is a very nice, recurring model.
  • We have seen it take off in the ESCO model, especially in retail but not much success with property managers, mainly because they are not interested in lighting, as the tenants are usually responsible for lighting and controls.
  • There is a distinction with LaaS, as you don’t pay up front CapX, but it is a little different than what venture guys were being sold.  It was presented as selling lumens as a service, maintained lux levels and even free re-lamping and that is a little different than the solar leasing model.  Lighting as a Service hasn’t really hit the market yet.

Much discussion on BigChinaLED acquiring US companies:

  • If there is a buyer in China, they must have capital that they can move easy.  
  • Anything with an exotic material that could go back to the U.S. Department of Defense will be a hard sell. Trying to protect the national interest will impede M&A activity. 
  • Cross border deals will be tougher under this administration.  There is another side to the outsourcing China battle.  Limiting outsourcing inhibits the evolution of business models.  Layers of complexity are now limited for evolving your business model.  
  • The pool of buyers has shrunk for certain technologies. Its’ not just China, it is international policies. Manufacturing decisions are long term and this uncertainty is harmful.  In four years or eight years time, you may have to change again. 
  • When we look at RFQs today and we see less hardware, more software.    How do you scale a service business, what are the barriers to entry? The service piece is getting bigger while hardware piece goes down.   Trend is fairly well known, but the service fees are the real question mark. 
  • Regarding M&A, while big private equity firms are looking at lighting, there is too much inventory.   We need to clear out of the pipeline a bit more.  If a business can show even $5.0M in recurring revenue, then you have their attention.