Date: February 3, 2008
Media: Asbury Park Press
City: Neptune, NJ
Section: Business Sunday

February 3, 2008
Driven to succeed

By DAVID P. WILLIS
BUSINESS WRITER

You could say that the school bus business drives through Denis J. Gallagher’s blood.

After all, Gallagher’s grandfather started Coast Cities Inc., a Neptune school and public transportation bus company in 1922.

A young Gallagher went to work for his dad and later took a job at Laidlaw Transit Inc., which bought the family business in 1987. Now, Gallagher, 53, is chairman and chief executive of Student Transportation of America, a Wall-based company he founded in 1997.

“I always say my father taught me the first three letters of the word “business’ and I had to teach myself the business part,” said Gallagher.

Since he started, Gallagher has had his foot on the accelerator, buying 31 smaller bus companies and winning about 40 contracts, expanding his operations to 10 states and Ontario, Canada.

Student Transportation of America is now the fourth-largest school transportation com-pany in North America, with more than 5,000 school buses, carrying about 300,000 students to and from school each day.

Gallagher grew up in the bus business at Coast Cities. He worked there and learned how to dispatch, drive, fix, clean and park buses. He would go on to become company president in 1984 before Coast Cities was sold to Laidlaw, the largest school bus company in North America.

It was a time of consolidation for the school bus industry. Companies such as Laidlaw and Ryder Public Transportation Services were buying small bus companies. All of the major players were interested in Coast Cities.

“It was a question do you want to join with one of them and maybe be a part of something bigger or do you want to try to survive on, being a small local company,” Gallagher said.

On his own

After the purchase, Gallagher went to work for Laidlaw, holding several high-level executive positions, including senior vice president of the company’s East Coast operations. But in 1996, he left, setting out to raise money and build his own company.

Venture capital firm Golder, Thoma, Cresey, Rauner Inc. backed his enterprise, then called Global Passenger Services LLC, committing $100 million to buy bus and motorcoach companies. At the time, Student Transportation of America was a subsidiary. The other company was Travelways Inc.

The company’s strategy for the bus business was to buy companies, win contracts for student transportation services and convince districts that own their own bus fleets to privatize.

Gallagher started to buy bus companies, including Rick Bus Co. of Trenton, which had a fleet of 160 buses, in 1998. He also signed up school districts, including Lakewood.

In May 2000, Gallagher decided to split the company, to allow Student Transportation and Travelways to concentrate on their own markets.

“My expertise was in the school bus business,” Gallagher said. “Although it was the smaller piece, it was something that, I think, was near and dear to my heart and something that I knew a heck of a lot more about.”

Revenue at Student Transportation has grown from $86 million eight years ago to a projected $221 million for fiscal year 2008, Gallagher said. “We have literally doubled the size of our company in the last three years.”

But the company reports a net loss. It’s because one half of the company’s distribution to shareholders counted as an expense against net income, the company said.

The structure of those payouts is in the process of being changed and STA expects to report positive net income on an annual basis once the change is completed.

Driving children to and from school is a consistent business, said Aleem A. Israel, an analyst with Cormark Securities.

“It is a recession-resistant business,” said Israel. “Kids go to school whether there is a recession or whether there is a good economy.” The company also has good long-term contracts, he said.

Going public

STA has enjoyed other milestones. In 2004, the company raised about $116 million in an initial public offering of stock on the Toronto Stock Exchange.

Why Canada? STA was not big enough for the New York Stock Exchange and the Toronto exchange was “built for small companies who need access to capital,” Gallagher said.

Now the company is looking to trade on an exchange in the United States to expand its shareholder base. So far, only about 10 percent of the company’s shareholders are U.S. residents and the rest are Canadian.

Since the initial public offering, the company has raised about $130 million from the private and public markets.

Canada has become an important area of growth for STA.

In 2005, the company entered the Canadian market with a $4 million acquisition of the school bus division of Ayr Coach Lines, which is located in Waterloo, Ontario.

The company has bought a total of four firms in the last 18 months. “We have started to build a nice base of operations in Ontario,” Gallagher said.

Last month, it completed a $41.8 million acquisition of Canadex Resources Ltd., one of the largest independent school bus operators. But the bus operator also has an interest in over 420 natural gas and oil wells in Texas and Oklahoma.

“It was the only way I could buy the company,” Gallagher said. “There was a lot of guys that wanted to buy the school bus business and there was a lot of guys who wanted to buy the oil and gas, but nobody wanted to buy the combined.”

But it gave Gallagher the chance to buy a company that would increase its Canadian revenue by 67 percent. STA will likely sell the energy portion of Canadex and pay down debt.

More purchases

There is still plenty of room for more acquisitions in rural and suburban markets, Gallagher said.

“There are still 4,000 mom-and-pops still out there,” he said. “We’re definitely looking.”

After buying a bus company, STA is able to seek out contracts in the area. Also, while it is a $15 billion industry, about two-thirds of school districts still operate their own buses, Gallagher said. So, STA tries to convince school districts to privatize.

Student Transportation will have an opportunity to acquire other smaller school bus companies, particularly from owners who don’t want to run a company anymore, said Greg R. Colson, an analyst at Wellington West Capital Markets Inc.

“Student transportation typically has a really good history of servicing their customers,” Colson said.

There is always going to be consolidation in the industry, Israel said.

“You’re going to still continue to have some operations where maybe the entrepreneur is getting to the age where they don’t want to operate the business anymore,” said Israel.

Consolidation is happening locally. Last summer, Middletown-based Murphy Bus Co., at the time the largest independent school bus contractor in New Jersey, was sold to Downers Grove, Ill.-based Durham School Services.

STA also may reap some benefits from another merger in the industry, Israel said. Last fall, Laidlaw International was bought by FirstGroup PLC, Great Britain’s largest bus company, for $2.8 billion.

In some cases, Laidlaw and FirstGroup may have both had the contracts in the same districts. Schools often like to have two different providers, Israel said.

Student Transportation has an excellent safety record, which helps attract business, Israel said. “That really builds your reputation.”

Every weekday morning, drivers for Student Transportation of America head out of their lot in Lakewood to pick up schoolchildren in the district. (STAFF PHOTO: DAVE MAY)

The company, founded by Denis J. Gallagher a decade ago, now owns 5,000 school buses in the United States and Canada