This blog was written with support from Marcus Torchia. Itron sent ripples through the smart metering community last Wednesday with the announcement of a big acquisition and a critical new pilot. On an eventful 2011 Q4 earnings call, Itron revealed that the company has agreed to acquire leading cellular AMI communications provider SmartSynch and that the new Itron-Cisco IPv6 smart grid solution has been selected for National Grid's high profile Worcester trial. What does this all mean?
The Price is Right
Venture capital has flocked towards smart grid investments in recent years, with some exuberant analysts claiming that the smart grid could be '1000 times larger than the internet.' Itron agreed to acquire the privately held SmartSynch for $100M, a 2x multiple on SmartSynch's expected revenues in 2012. SmartSynch's particular blend of services and hardware is unique, but recent deals have established a few points for comparison:
- Landis+Gyr was acquired by Toshiba in May of 2011 for $2.3B, a 10x multiple on EBITDA (not revenues)
- In November, Sensus reportedly explored a sale for 8-10x EBITDA, or ~$1B. Sensus had $865M in sales in 2010.
- Silver Spring Networks filed for a $150 million IPO for an undisclosed number of shares in July of 2011. Silver Spring generated $70M in revenue in 2010 ($46.7M in Q1 2011) while reporting outstanding debts of more than $400M. Silver Spring's S-1 reported aggregate net proceeds of $271M from preferred stock financing.
None of these comparisons are perfect. Landis+Gyr and Sensus are far more diversified and Silver Spring's technology and business model do not fully align with SmartSynch. However, when one considers that (as estimated by Katie Fehrenbacher of GigaOM) SmartSynch has raised at least $91M in funding over the last 12 years, the acquisition appears to be a relative bargain for Itron.
Conversely however, at $100M and a 2x multiple on 2012 expected revenue, SmartSynch hardly appears to have been a cash-cow for VC; one almost has to wonder what sort of return the LP's behind SmartSynch's VC backers will realize after debt, dilution, and management fees! Valuation in corporate M&A has always been a mystical science but, with Itron's purchase and the slow progress of Silver Spring's IPO, is the luster fading from smart grid investments? Is the focus of smart grid investors shifting away from communications?
"…providing an integrated cellular option makes sense."
Financial musings aside, momentum has rapidly been building for cellular AMI communications in the last 6 months; after the Consumers Energy announcement in September, Jesse Berst wrote that AMI vendors would look to "beg, build or buy a cellular option." With SmartSynch, Itron has bought the leading cellular smart grid networking company in North America.
The combination of Itron and SmartSynch presents a number of natural synergies. Most importantly, interest in cellular AMI solutions has intensified in recent months and SmartSynch had become a significant competitor in Itron's core large-utility market; Itron has transformed a weakness into a strength. Itron will soon be able to offer a native cellular solution for both mesh network infill and point-to-point AMI; adding cellular to the portfolio allows Itron to match (some would say surpass) the capabilities of Trilliant's CellReader solution and Silver Spring Networks recently revealed Gen4 technology. Finally, while cellular deployments at smaller municipal and cooperative utilities have been limited, SmartSynch's hosted managed services offering could present a pathway for Itron to target smaller customers.
Like any merger however, this marriage will not be without obstacles. Notably, SmartSynch and (Itron-partner) Cisco's Grid Router's offer overlapping capabilities that will need to be reconciled. Philosophical differences also exist on the HAN side, as the Centron Openway meter is factory equipped with a ZigBee module; SmartSynch noted at DistribuTECH that it believes the future HAN will come to favor WiFi rather than ZigBee.
Regardless of the operational concerns of integration however, Itron clearly emerges from this acquisition as a stronger competitor in the North American ANSI market. Financial markets seem to agree as Itron shares have jumped nearly $8/share since Wednesday.
"The importance of this project is not its size…"
The SmartSynch acquisition has dominated discussion but Itron's agreement with National Grid also deserves attention. While LeRoy Nosbaum, Itron's newly (re)appointed CEO, choose to deflect focus away from the size of the National Grid pilot and towards
"…what will be learned by both National Grid and Itron about optimizing the grid and giving customers choice and control over their energy usage,"
the launch of this 15,000 customer pilot is a big step forward for National Grid and smart metering in Massachusetts.
National Grid's path to pilot has been tortuous - National Grid originally filed for a 15,000 customer, $56M pilot in 2009, only to voluntarily withdraw the filing in June of 2011. The approval of a slimmed down $44M, 15,000 customer pilot must have been a relief, and will help the company compete as Massachusetts moves towards a decoupled market over the next few years. This pilot also advances smart metering in Massachusetts; despite impending decoupling and a liberal reputation, AMI in Massachusetts has been limited to an early fixed-network, multi-utility deployment by Unitil and scattered deployments by individual municipalities.
Additionally, while the pilot is small (though larger than many Muni's in Massachusetts!), National Grid has 3.4M customers in New York and New England. This pilot is another win for the Itron/Cisco solution (currently under deployment at BC Hydro), and reaffirms Itron's ability to pull in large projects in a slow North American IOU market.
"…you guys have been skeptical…"
After announcing plans for reorganization in the second half of 2011, Itron has entered 2012 swinging, exhibiting an aggressiveness that hasn't been seen in recent quarters. On Wednesday's earnings call, Nosbaum painted a picture of long-term international growth for Itron and challenged the industry perception of both the company and the smart grid market at large. Nosbaum is clearly setting a new tone for Itron and has made a big splash in just two quarters at the helm. Will the market play out as Itron has predicted? Time will tell, but they're certainly off to a great start in 2012.
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