Burnaby-based fleet manager ups its bid for competitor

Wednesday, 16 September 2009

WebTech’s $44 million acquisition of Toronto’s Grey Island Systems could vault it into the top spot among telematics providers in Canada

Curt Cherewayko

Its original advances spurned, WebTech Wireless Inc. (TSX:WEW) has sweetened its bid for a Toronto-based competitor in a deal that would make WebTech the largest Canadian player in telematics and location-based services.

In the proposed $44 million merger, Burnaby’s WebTech would pay a healthy premium for Grey Island Systems International Inc. (TSX-V:GIS), but analysts remain keen on the deal despite the boosted price.

WebTech, which makes GPS-based vehicle tracking and fleet management systems, increased its buy offer after Grey Island’s shareholders scoffed at WebTech’s initial offering, which was in the form of a share exchange that valued Grey Island at approximately $38 million.

WebTech raised the share exchange ratio by 16.7% in its new offer.

“We looked at it and thought that, in the big scheme of things, [raising the bid] honestly doesn’t matter,” said Anwar Sukkarié, WebTech’s president and CEO.

Analysts see the acquisition as a natural fit for WebTech, which will gain a larger foothold in the government sector.

In a note to clients following the proposed deal, Dev Bhangui, an analyst with Haywood Securities Inc., said Grey Island is a “juicy topping” for WebTech.

He noted that Grey Island – which sells wireless fleet management systems to government agencies such as ambulance and transit fleets – has roughly $12 million in cash and low turnover among its customers.

WebTech would have roughly $20 million in cash following the acquisition.

Bhangui noted that the deal provides WebTech with cross-marketing opportunities.

For example, WebTech signed a deal with AT&T Inc. (NYSE:T) this year, in which the carrier will be offering WebTech’s system in its product suite to government customers.

To date, Grey Island has penetrated only the Canadian and U.S. markets, but its products could be sold internationally by WebTech under a similar deal with AT&T or other carriers.

Banghui’s target price for WebTech was $2.50 following the deal.

WebTech’s share price closed at $1.08 last Wednesday.

WebTech is forecasting that the combined company will be profitable next year and generate $80 million in revenue.

It’s projecting its 2011 revenue to be more than $110 million.

In comparison, the separate entities generated $42 million in revenue in 2008 and recorded a $7 million loss.

In 2008, WebTech reported $20.8 million in revenue and a $7.8 million loss.

The deal would lift WebTech past Virginia’s Wireless Matrix Inc. (TSX:WRX) – which has an office in Burnaby not far from WebTech – into the top spot among telematics providers in Canada.

Nick Agostino, an analyst with Research Capital Corp., put a $1.50 target price on WebTech shares following the announcement of the deal.

He said the deal’s pros outweigh its cons for WebTech, although it’s paying a premium relative to other transactions in the telematics sector, which has undergone major consolidation of late.

Other recent deals in the sector include the acquisition of Finland’s Mobisoft OY by Richmond’s DDS Wireless International Inc. (TSX:DD) for $7.7 million in 2007.

Only a few months later, DDS also bought Kirkland, Washington-based StrataGen Systems Inc. for US$6 million.

Among two of WebTech’s largest milestones in recent history are orders from FedEx and GNP, the top Mexican insurance company.

Both companies are conducting pilots with the WebTech systems and are expected to make additional orders in the new year.

WebTech also stands to benefit from U.S. government stimulus money that is trickling down to WebTech customers such as government agencies and ports in California.

In WebTech’s 2008 annual report, Sukkarié noted that some people forget that WebTech was profitable for 10 out of 12 consecutive quarters until late fiscal 2007.

That was when the company ran into problems with a Brazilian carrier.

WebTech reported losses of $22.2 million in 2007 directly related to Crown Telecom, a reseller that effectively stopped making payments on a loan agreement it had secured from WebTech.

But Banghui noted that the Brazilian fiasco is a distant memory.

As well, he and other analysts are not concerned with two patent disputes that WebTech is embroiled in, because they have an impact on only a small segment of the company’s business.

Said Banghui: “We have always been bullish on [WebTech]’s prospects and believe the company will shortly bask in news of significant multiple contracts from Tier 1 customers – tripling its revenue profile and transitioning its business as vendor of choice for the ‘big boys’ as it exits 2009.” •