The exit of Infrasource Inc.'s private equity investor last year planted the seeds of the March 19th announcement of Quanta Services Inc.’s acquisition of Infrasource, an all-stock transaction valued at $1.26 billion.

GFI Energy Ventures/Oaktree Capital Management, which invested $280 million in Infrasource in 2002, cashed out its position in two secondary stock offerings last year. “We reached the end of the equity investor horizon about a year ago and started to explore strategic offerings,” says David R. Helwig, chief executive of Infrasource. “After an exhaustive review we concluded that the deal structure as is gives investors upside premium and provides for the participation” in future upside as Quanta shareholders.

The two companies predict substantial benefits from the deal, not least of which is $20 million in hoped-for synergies in 2008. The combined companies will have revenue of $3.1 billion and adjusted earnings before income tax, depreciation and amortization of $270 million.

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    Much of the potential depends on electric utilities improving and expanding the transmission and distribution grid. Infrasource will enhance Quanta’s electric power transmission and distribution capabilities, says John R. Colson, Quanta’s CEO. The two companies will integrate project and asset management functions and combine and share equipment, he adds.

    Alex Rygiel, a senior analyst with broker Friedman, Billings Ramsey Group, noted at a teleconference on the day of the announcement that Infrasource’s business had been “a little lumpier” than Quanta’s with “from time to time, cost overruns.” As a result, he wanted to know, what had been the extent of the due-diligence by Quanta of Infrasource’s backlog?

    Colson says the two companies are well acquainted as competitors and therefore Quanta knows Infrasource’s backlog and its earnings potential. “We were acquainted fairly well and bid on those projects and did due-diligence and felt comfort with their estimates,” Colson says.

    Several major new transmission and distribution contracts are due to be solicited or awarded soon, company officials say. Although Quanta and Infrasource will no longer compete, the contracting marketplace remains fragmented, they say.

    The deal gives Quanta a much bigger role than it had in the natural gas transmission line design and construction business, services that provide roughly 30% of Infrasource’s revenue. In general the margins in that segment are lower than in electrical transmission and distribution construction, but the field “is big and growing as several regulatory changes are causing companies to spend to upgrade,” says Colson.

    Based in Media, Pa., Infrasource’s companies include Dashiell, M. J. Electric, Transmission Services (formerly Maslonka), Underground Services, Engineering (including REALTime Utility Engineers and Technology) and Blair Park/Sunesys.

    In addition, Infrasource earns about 5% of its revenue in the “dark fiber” telecommunications business, in which is builds and owns and leases capacity to pre-signed clients. Both Colson and Helwig expressed enthusiasm about the profit potential of that business.

    Infrasource on March 5 reported 2006 net income of $26.1 million, up from $13.7 million the prior year, on revenue of $992.3 million, compared to $853.1 million in 2005.

    Quanta, a much bigger company based in Houston, reported 2006 net income of $17.5 million, down from $29.6 million in 2005, on revenue of $2.13 billion, compared to $1.86 billion the year prior.

    Quanta was founded by several electrical contractors in 1997 as a roll-up but it made acquisitions more slowly than other roll-ups and seemed more focused on operations than some others. Its units perform electric power, telecommunications, gas pipeline and broadband cable contracting and several specialty services. Although most specialty contractors struggled when their markets took a nosedive beginning about 2001, helping send some of the companies into bankruptcies or deep financial troubles, Quanta persevered. In 2002 the firm fended off of a hostile takeover attempt by its largest shareholder, Aquila Inc., formerly Utilicorp.