Date: February 25, 2008
Media: NJBiz
City: New Brunswick, NJ
Section: News

Trying to Acquire Its Way onto the Big Board
A school-bus operator swallows up rivals in a bid to get listed
2/25/2008
WALL-Student Transportation of America Ltd. (STA) has a strategy to get listed on the New York Stock Exchange (NYSE) or Nasdaq: Buy up other companies.

The publicly traded school bus operator last month paid $42 million for Canadex Resources Limited in Ontario in a deal that bulked up STA’s fleet to 5,000 buses serving school districts in the United States and Canada. “This was our largest deal by far,” says CEO Denis Gallagher, whose Wall-based firm now owns five Canadian school bus lines.

Gallagher says the purchase puts STA closer to listing its stock on a major U.S. exchange, with the increased access to capital that a listing could provide. “One of our objectives during the coming year would be to seriously look to list on Nasdaq or NYSE,” he says.

The 11-year-old company currently lists securities called “income participating securities” on the Toronto Stock Exchange and on the over-the-counter pink sheets, where they have been changing hands for about $10 a unit. Each unit consists of a share of common stock and a note that can be converted into common stock at the discretion of the holder.

Gallagher figures the unit holders will convert when STA’s market cap-the total value of its equity outstanding-rises from $350 million with Canadex in the fold to $500 million. He says the STA board will determine the conversion price. Once the units have been converted, Gallagher plans to seek listing on the NYSE or Nasdaq.

STA already meets the minimum listing requirements for both exchanges, which are $100 million for the Big Board and $15 million to $35 million for Nasdaq. But Gallagher wants to convert all the income participating securities on the Toronto exchange to common stock on a U.S. exchange and is therefore aiming for the $500 million market cap.

Gallagher plans to reach that level by buying out more rivals. He says 60 percent of STA’s $168 million of revenue for the fiscal year that ended June 30 came from acquired companies. He says the Canadex deal will push revenues past $200 million. Included in the deal, he says, were Canadex interests in natural-gas and crude-oil wells in Texas and Oklahoma, interests that he plans to sell to raise cash for more acquisitions.

STA two weeks ago reported net income of $700,000 on revenue of $54.5 million for the fiscal second quarter ended Dec. 31, compared with a loss of $2.4 million on revenue of $46.9 million for the same period a year ago.

Gallagher says STA has acquired 31 bus companies throughout North America in the past eight years, and plans to keep buying despite high gasoline prices. “If we get a bit of inflation, it’s good for us,” he says. “Our contracts get renewed at higher values.”

Gallagher says 55 percent of STA’s contracts allow it to pass increased fuel costs along to school districts. “Fuel [absorbs] 7 to 8 percent of our revenue,” he says. “Fuel last year was $2.43 per gallon for diesel and was $3.27 the other day. That’s a large increase in one year.

“A lot of our school districts, like in Pennsylvania, also buy the fuel for us,” he adds. He says such districts use their tax-exempt status to lower the cost of fuel, which they then sell to STA.

Meanwhile, many school districts are reluctant to privatize their bus service. According to the National School Transportation Association in Washington, D.C., about 70 percent of U.S. districts own and operate their buses. Private contractors represented 30 percent of school bus operators last year, up from 25 percent in 1985.

Robin Leeds, an industry specialist at the National School Transportation Association, says privatizing bus operations lets districts free up funds for education. “Contractors can bring in a whole new fleet of buses without capital expense,” says Leeds.

She says school districts are scrambling to balance their budgets and many are looking for ways to cut costs. “What we have seen is schools reducing transportation services by limiting the number of activity trips and increasing the walking distance for students to take the bus,” Leeds says. “And some districts charge to ride the buses.”

She says such moves could open more school district doors to STA and other private bus companies.

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