Date: January 21, 2008
Media: Dow Jones Newswire
City: Toronto
Section: Newswire

DOW JONES NEWSWIRE
January 21, 2008

Student Transportation Driving Deep Into Ontario

By Monica Gutschi of DOW JONES NEWSWIRES

TORONTO (Dow Jones)–Denis Gallagher wanted Canadex Resources Ltd. (CDX.T) so badly, he was willing to purchase the company’s oil and gas holdings as well as its key school bus transportation business.

The chief executive of Student Transportation of America (STB.T) had been interested in Toronto-based Canadex since he first left Laidlaw International Inc. (LI) to set up his own company 10 years ago. While he couldn’t figure out the synergies between the energy assets and the school buses, he was willing to buy both to get the latter.

Canadex is one of the biggest operators of school buses in Ontario, with most of its routes in the lucrative and fast growing area surrounding Toronto. The majority of its contracts also include fuel-price protection clauses, providing a hedge against the volatility in oil prices.

“We knew there was a value for school bus business,” Gallagher said in an interview. “The way to do that was to tender for the entire piece.”

Gallagher will now tuck Canadex’s Parkview Transit operations under the Student Transportation umbrella, making Student Transportation the third-largest provider of school busing services in Canada.

The buy will also significantly boost its Ontario routes, an area so attractive that Student Transportation has snapped up four other smaller companies in the past year or so to cement its foothold there.

“We love the Ontario market, obviously,” Gallagher said, adding the company will continue to look for other acquisitions in the province.

He noted that, even though the C$41.8 million purchase of Canadex has added to Student Transportation’s debt levels, the company still has plenty of “dry powder” left. Only last week, Student Transportation raised its credit facilities by C$40 million, refilling its coffers for additional buys.

Meanwhile, the Canadex acquisition adds another 350 vehicles to Student Transportation’s Canadian fleet, taking it to about 925. It will also increase Canadian revenue by 67%, a key consideration for a company with substantial U.S. operations but that pays distributions in Canadian dollars.

The addition of Canadex will also increase cash flow by 15% and add more than C$11 million in annual EBITDA.

Student Transportation plans to shortly sell the minority investments in U.S. oil and gas operations that came along with the deal. Gallagher said he’s already received several expressions of interest.

Aleem Israel, an analyst with Sprott Securities, said Student Transportation got the oil and gas interests at little additional cost, while giving the company a major boost in Ontario. He says Student Transportation could probably sell the energy assets for C$15-$18 million.

Given that, he estimates Student Transportation paid five times EBITDA for the school bus business, “an excellent multiple for a business of that size.”

As well, he noted in a recent research note the valuation was reasonable given Canadex’s EBITDA margins above 33% and its dominant presence in the Greater Toronto Area.

“We believe this acquisition fits like a glove,” Israel wrote when Student Transportation announced the acquisition. “Canadex’s school bus operations represent a solid fit with STA’s goal of increasing its presence in Canada, particularly in key high growth markets.”

Israel doesn’t own Student Transportation shares, but Sprott does have an investment-banking relationship with the company.

Student Transportation plans to continue its strategy of growing about 60% through acquisition and 40% organically, Gallagher said. He noted there are about 4,000 mom-and-pop school bus operators throughout North America, making for a large potential pipeline.

He also noted the recent merger between FirstGroup PLC (FGP.LN) and Laidlaw to create the largest school bus operator in North America will create additional opportunities. The merger gave the consolidated company a 42% market share and sparked some mandatory divestitutes. Any future purchases by U.K.-based FirstGroup in North America will also require antitrust approval.

As well, Gallagher believes many school districts will be wary of handing all their transportation contracts to one operator, which could give Student Transportation additional opportunities to bid on contracts.

Company Web Site: http://www.sta-ips.com