DRX: Deploying Cash on Acquisition of Groupe LAR
What you need to know:• ADF entered into an agreement to acquire Groupe LAR Inc. for $19M. LAR operates in the machining, welding, and industrial mechanics sectors, primarily focusing on the large-scale hydroelectricity market.
• LAR posted $80.9M in revenue in 2024 (ending December 31st) and had a backlog of $104.5M as of July 31st.
• We view the acquisition as a strong positive, diversifying DRX’s revenue growth and cyclical exposure.
This morning, ADF Group (DRX:TSX) announced that it has entered into an agreement to acquire Groupe LAR Inc. for $19M. The acquisition expands DRX’s offering into adjacent products and sectors, while taking advantage of a distressed seller. The transaction is subject to approval from the Superior Court of Québec (Commercial Division), amongst other conditions. We are maintaining our BUY rating and our $12.00/share target price on ADF Group.
About Groupe LAR
Groupe LAR was established in 1942 and is based in Métabetchouan in the Saguenay-Lac-Saint-Jean region, in Quebec. LAR operates in the machining, welding, and industrial mechanics sectors, serving as a Canadian leader in the design, manufacture, and installation of mechanically welded steel structures. LAR is primarily focused on the rapidly expanding large-scale hydroelectricity market, but also offers customized overhead crane solutions for the heavy industry. LAR focuses on an integrated approach across design, fabrication, and installation, utilizing robotic welding systems.
The Company generated $80.9M in revenue in 2024 (ending Dec 31st) and had an order backlog of $104.5M as of July 31st. ADF indicated that the backlog should be progressively realized before the end of ADF’s fiscal year ending January 31st, 2027.
Rationale
Management has highlighted that there are significant synergies between the two groups, positively contributing to ADF’s bottom line and diversifying its offering in the context of U.S. tariffs. The acquisition will also maintain 200 well-paying jobs in the greater Saguenay-Lac-Saint-Jean region and even grow this number.
Transaction Terms
Consideration payable for the acquisition is $19M plus a closing adjustment linked to certain working capital expenses. The $19M includes $15M in cash and 449,944 subordinate voting shares (~$4M). ADF will make the cash payment using its existing cash balance ($75.3M as of Q1). This equates to 0.2x sales compared to ADF at 0.8x (FY26E). While we do not know the profitability for LAR, a 10% EBITDA margin would equate to 2.3x compared to ADF at 4.0x (FY26E). If ADF can extract its same 20% EBITDA margins, the acquisition would be valued at 1x EBITDA.
The Transaction is to be completed by way of a reverse vesting order under CCAA. The LAR Group will apply to the Court for the reverse vesting order and expects that such application will be heard in the coming days. The Transaction is expected to close shortly after approval by the Court.
ADF Group is engaged in the design and engineering of connections, fabrication and installation of complex steel superstructures, heavy steel built-ups, as well as architectural and miscellaneous metalwork for the five principal segments of the non-residential construction market namely, office towers and high-rises, commercial and recreational buildings, airport facilities, industrial complexes and nuclear facilities, and transport infrastructures.
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