(NYSE: ESE), which has been shopping around its smart grid subsidiary Aclara for the past six months, has found a buyer.
Private equity firm Sun Capital Partners will purchase Aclara for $150 million. The price will be a net loss of about $50 million.
“We are pleased to see a clear end in sight for the proposed divestiture, and we believe the cash proceeds will ultimately allow ESE to strengthen its balance sheet, lower its debt service costs, opportunistically repurchase shares, and improve management’s focus on accretive acquisitions in its existing core business,” Sean Hannan, equity researcher for Needham & Company, wrote in an email.
“While our expectations had recently been drifting toward a $200 million purchase price, the official $130 million purchase value is a somewhat disappointing outcome,” Hannan continued.
After divesting itself of Aclara, ESCO will focus on its core businesses of fluid control solutions for mission-critical systems and RF shielding and testing. In the utility market, it still owns Doble, which provides diagnostic services and hardware to the utility industry.
“ESCO will be a more strategically focused, higher-margin business with a much steadier and predictable growth profile,” Vic Richey, ESCO's Chairman and CEO, said in a statement. “This divestiture presents an improved outlook of our future and further enhances our ability to increase shareholder value.”
ESCO began looking for a buyer for Aclara last August and said at the time that it expected a sale to be completed within 90 days. Aclara’s core business in smart metering has slowed in recent years as the North American market experienced a downturn.
In early 2013, Aclara purchased the assets of Metrum Technologies, a Texas-based company that provides public network communications products for utilities, in order to beef up its advanced metering communication offerings, which already included powerline and RF mesh. Even with the acquisition, however, Aclara has struggled to expand.
"Over the last few years, Aclara has pushed for innovation in consumer analytics and demand response management only to see competitors catch up in the former and partners disappoint in the latter,” said Ben Kellison, senior grid analyst with GTM Research. “Like other AMI providers such as Itron, Elster and Echelon, Aclara was caught up in the fervor to expand its products to maintain stimulus-level revenue around 2010, but has had trouble expanding beyond its load control and [advanced metering infrastructure] businesses.”
Aclara has a large base of municipal and cooperative clients, which do not offer the eye-popping contracts that large investor-owned utilities can, but they do present a steady stream of business for savvy vendors. While municipal utilities only serve about 13 percent of electric customers in the U.S., they are expected to spend $4.5 billion to $9 billion on smart gird from 2012 through 2017, according to GTM Research.
The former ESCO subsidiary’s had a $62 million loss in 2013, Kellison said, “but with well over 100 electric utility customers, complemented by a multitude of gas and water clients, Aclara has the customer base to garner revenue for some time.”
Aclara’s suite of turnkey consumer engagement solutions is also challenged by various players from Opower to Comverge, which are all vying for utilities’ consumer demand-side management business. But demand response is growing in most parts of the U.S., and consumer engagement strategies will likely grow more sophisticated as utilities with smart meters look to offer more services to customers, which means there are growth opportunities for vendors that continue to innovate and offer cost-effective consumer solutions.
“The restructuring and refocusing available via private equity ownership will be rough on the company,” added Kellison, “but could introduce proper staff scaling and improved efficiency and pull the organization out of the red."
The sale is expected to close this month.