IPO prospects as HRV hits acquisition trail

Home ventilation pioneer HRV may be heading to the NZX after embarking on a 'roll up' plan backed by its Australian private equity owners.

HRV is on the acquisition trail with a planned roll-up of small companies in the retrofit healthy home sector and initial public offering on the sharemarket a potential exit option for its private equity majority owner.

The Auckland-based company, which was started by two entrepreneurs in 2003 selling home ventilation directly to Kiwi householders, has already bought four businesses in the past two years extending its reach into water purification, window double-glazing, and heat pumps.

A roll-up is when investors, typically private equity firms, buy up and merge small companies in the same market into a bigger and better entity with economies of scale.

HRV is planning to expand its latest acquisition, Auckland heat pump specialist Energy Efficient Solutions, nationwide later this year, retaining it under its own brand.

Chief executive Bruce Gordon said the retrofit healthy home sector was gaining traction at the "political awareness level" with Labour's Healthy Homes Guarantee Bill which would set minimum heating and insulation standards for rental homes expected to be voted on in October. A near-identical bill failed to make it past its first reading in March last year.

If passed, the bill is expected to drive more business for HRV which is already enjoying good growth from diversification with group revenue forecast to be $65 million this year compared to the low $40 million mark last year. With franchisees added in, group revenue is forecast to rise to $85 million.

HRV has already introduced a lease-to-buy option for landlords to pay a fixed amount over two to four years and a nominal amount at the end of the lease term to own a ventilation system and/or bathroom extraction. There are tax benefits to spreading the cost over a reasonable period while still keeping tenants happy. Initial results of the annual HRV survey of NZ homes show a third of renters surveyed had moved out because the rental was damp, cold, or mouldy due to poor building practices.

Diversification has meant a change in the direct marketing model HRV was founded on to having multiple sales channels including online. It has also reduced the number of independent franchisees selling home ventilation from 20 to seven.

On-selling of new products to its 165,000 existing customers contributed 46 percent of this year's revenue. Of the customers who bought a ventilation product in 2011, 22 percent have since purchased another core product from HRV, lifting the lifetime value of each customer to $7,000 today from $4,300 in 2009.

This sector has not been regarded as a sector and we are poised to take the lead in that. There's no reason why there can't be other entrants and we'd relish competition as duopolies do well in this market.

HRV chief executive Bruce Gordon

Gordon wants to buy more companies in what he calls the "invironment space" with revenue in the $10 million to $20 million range and which may be short of capital for growth. The investment can be leveraged with HRV's existing assets, he said.

"We're interested in anything to do with retrofitting of homes from carpeting to drapes to solar which is an emerging market in New Zealand."

Australian private equity company Equity Partners bought into HRV in 2010 and now has a 60 percent stake while one of the co-founders Michael Perrett has retained a 20 percent shareholding and the balance is held by management.

Typically private equity companies look to exit their investments after seven years but Gordon said the closed fund invested in HRV had three or so years still to run. However, he said Equity Partners, who appointed him, was starting to think about exit options including an IPO, trade sale, or financial sponsor such as a bigger private equity firm.

There was potential for an IPO once HRV's acquisitions had shown improvement in the next 18 months to two years, Gordon said. New Zealand already has a couple of roll-ups - Evolve Education and Intueri - listed on the sharemarket while in Australia the model has been thriving as technology costs fall despite some flops such as ABC Learning Centres and eye specialist Vision.

"This sector has not been regarded as a sector and we are poised to take the lead in that," Gordon said. "There's no reason why there can't be other entrants and we'd relish competition as duopolies do well in this market."

HRV expanded into Australia in 2009 and has had around 7,000 customers for its home ventilation systems and bathroom extraction.

But Gordon said expansion in Australia was a "growth opportunity for someone else" because of the capital required to build the brand and scale. "It has to be established as a sector but there is a big opportunity just as there was in New Zealand 13 years ago," he said.

Australian homes tend to be built to higher specifications but the sub-tropical climate in some areas often causes mould in double-glazed, well-insulated homes, which is also happening with new builds in New Zealand, he said.

"They're sealed at night which is great for leaky homes but 11 litres per day of moisture is produced by the average family and that has to go somewhere. In buildings, it tends to go into the soft furnishings and blinds so you wake up to mould spores."