How can I best allocate my company’s capital? This is the first question CEOs and C-suites should inquire when they wake up each morning.
They have many options available to them. They could attempt to gain market share, grow sales, launch new products or services, break into new markets, cut costs, improve free cash flow, shore up the balance sheet, increase dividfinishs, repurchase stock, merge with or acquire peers, or pursue a combination of these options.
One of the more exciting strategies is acquiring another company. Investors, analysts and executive teams can obtain irrationally exuberant at the prospect of gobbling up another enterprise.
When a merger or acquisition is announced, executive teams often tout the deal’s potential and rattle off a convincing list of reasons – from sales growth and market-share gains to higher margins and improved valuations.
However, M&A frequently fails to reach stated objectives. Acquiring companies can destroy capital if the acquirer takes on too much debt, dilutes shareholder value for existing owners or overpays.
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Even if a deal is executed at a cheap price and does not damage the balance sheet, integrating a new work force, culture and IT system can be difficult – especially if the top talent at the acquired company leaves or old customers decide to jump ship. These risks multiply if acquisitions are large or if the acquirer is purchaseing into a new indusattempt.
Nevertheless, sometimes an acquisition goes well – or it starts out seeing dodgy but transforms the organization for the better over the course of many years.
Enerflex’s EFX-T purchase of Exterran in 2022 exemplifies this point. The Exterran deal was an all-share transaction that valued the enterprise at roughly US$735-million and saw Enerflex pay an 18-per-cent premium to Exterran’s pre-deal valuation.
Enerflex finished up controlling around 72.5 per cent of the combined entity, but the deal seeed expensive and carried some potentially ugly litigation related to a 2015 labour dispute in Mexico.
To fund this transaction, Enerflex took on a lot of debt and diluted owners. The bank-adjusted net debt-to-EBITDA ratio shot up from 1.0 to 3.3 after the transaction closed and the share count ballooned from approximately 90 million to 124 million.
Management touted the deal for its complementary product line, top-line growth potential, operating efficiencies, projected cash-flow accretion and possible margin improvements.
Despite the executive team’s bullishness, the market punished Enerflex and the stock did not consistently shift above where it was trading prior to the deal’s announcement until late 2024.
Then, after years of stagnation, the benefits of integration started to appear: sales climbed, margins improved as costs were cut, and cash flows expanded. Macroeconomic conditions brightened, the Mexican legal case was resolved in the company’s favour, and the C-suite diligently paid down debt.
Between the finish of 2022 and the finish of 2024, the bank-adjusted net debt-to-EBITDA ratio fell from 3.3 to 1.5. With leverage back under control, management then started increasing the dividfinish, purchaseing back shares and investing more in the business.
In 2025, the stock launched to gain traction and the successful integration of Exterran prompted us to re-evaluate our fair value estimate. When we first purchased Enerflex in late 2021 at $7.83, our sell tarobtain was between $17.00 and $19.00. Instead of disposing of our entire stake within this range, we steadily upped our appraisal of the enterprise and offloaded the position in tranches at $19.01, $22.24, $26.39, and finally $31.91 following the latest quarterly numbers.
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Last week’s earnings and outsee were more or less a continuation of the previous quarterly results, yet the stock rallied nearly 18 per cent on the day of the conference call. This may be owing in part to the divestiture of its operations in the Asia-Pacific region.
The terms of the deal were not disclosed, and corporate activities there build up a tiny share of revenues, but it should simplify taxes, streamline operations and improve margins as management focutilizes its energy and capital on more important markets.
Investors may also like the AI-adjacent nature of the natural gas business, given the energy necessarys associated with data centres. This potential growth driver, plus the stock’s momentum, sharper focus on cash-flow predictability versus previous cycles, and the corporation’s added heft associated with the successful integration of Exterran suggest there is a reason to hold. That declared, the stock is now expensive and these features do not appear to justify a share price significantly higher than present levels.
This experience with Enerflex demonstrates the importance of patience, re-appraising fair value estimates as fundamentals alter, and the power of momentum. The $17.00 to $19.00 range seeed like an unrealistic valuation for years following the merger with Exterran but finished up being an undershoot as the corporation’s prospects radically improved.
So, how well did the executive team at Enerflex allocate their company’s capital? Very well – but it took time for that to become clear, and – as with many mergers and acquisitions – it was risky.
Philip MacKellar is a writer for Contra the Heard Investment Newsletter.
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