The Caisse de depot et placement du Quebec building is seen in Montreal in February, 2014.Christinne Muschi/Reuters
The Caisse de dépôt et placement du Québec is backing another fast-growing homegrown industry consolidator, committing $125-million in equity for a minority stake in Levio Consulting Inc.
The Quebec City-based information technology services firm has made 11 acquisitions in Canada to date, funded internally and with debt. It generates more than $300-million in annual revenue with operating earnings in excess of 20 per cent of sales. Now backed by Quebec’s giant pension fund manager, its first outside investor, Levio, is looking to make even larger deals across Canada and the United States in a quest to reach $1-billion in revenue by 2029.
“We would like to replicate with Levio what we did” backing other Quebec-based consolidators, including environmental consulting giant WSP Global Inc. WSP-T, IT consulting heavyweight CGI Inc. and online payments technology provider Nuvei Corp. NVEI-T, said Jacques Marchand, managing director with the Caisse’s private large capitalizations unit for Quebec. The Caisse last year bought stakes in two other Quebec-based mergers-and-acquisitions-driven software companies, Workleap Technologies Inc. and Vooban Inc. It is also a long-time shareholder in Alimentation Couche-Tard Inc., the corner-store empire built on takeovers.
Levio was founded in early 2014 by Francois Dion, who had started two companies in his 20s before going to work for LGS Group Inc. in 1998, two years before International Business Machines Corp. bought the Quebec consulting firm. Mr. Dion rose to the level of LGS vice-president, and in 2013 was offered the chance to lead IBM’s global business services group for Quebec. He turned it down and quit to return to his entrepreneurial roots.
“I saw the opportunity for digital transformation” across large enterprises and governments based on the speed and scope of new innovations proliferating globally, Mr. Dion said. He felt large clients would not only need to adopt the new technologies, but reorient their processes to accommodate the new ways of interacting internally, and with customers and partners across multiple digital channels. “Legacy systems are not well designed and constructed to support that,” Mr. Dion said. “There is still a lot to do on the enterprise and government.”
Mr. Dion’s first mandate was to help Desjardins Group integrate the former Canadian operations of State Farm Insurance. Levio’s 200 active, primarily Quebec-based clients are focused in financial services, telecommunications and government sectors, including Liberty Mutual Insurance, Fiserv Inc., National Bank of Canada and Morgan Stanley. It is also helping space technology company MDA Ltd. implement artificial intelligence used to operate the latest Canadarm.
Levio said it has expanded revenues by an average of 40 per cent annually over the past five years, with roughly one-quarter of the growth coming from acquisitions and the rest by landing new business or expanding engagements with clients. It typically pays for acquisitions with cash and shares in Levio (it has 200 employee shareholders, who Mr. Dion refers to as “intrapreneurs”), targeting regional consulting firms that provide new or expanded capabilities in areas such as cybersecurity or cloud computing, or deepening its reach into specific target industries.
Its most recent acquisition, SOLJIT, is a Montreal-based software integrator that holds “Summit” status with Salesforce Inc. as an implementer of the enterprise software giant’s offerings. “It would take many years for us to start a Salesforce practice and reach Summit status,” said Jean Royer, Levio’s managing partner, strategy and M&A. “By doing the SOLJIT deal, we are now a Summit partner and can leverage those sales relationships with Salesforce and bring their expertise to our clients.”
The Caisse’s financing comes in the form of an equity line that Levio can draw upon when it does deals over the next two years, at which point the line could be renegotiated. “Our goal is to put in more than $125-million,” Mr. Marchand said. “If we could deploy $200-million in this company we would be happy.” The Caisse has to date invested more than $800-million apiece in WSP and CGI to help pay for acquisitions.
Any Levio deals the Caisse finances in the next year will be done at a set valuation for the company in a deal inked between the two parties last week that values Levio at more than $600-million, and after that based on multiples of operating earnings at the time the company draws on the funding facility. “We don’t want to dilute shareholders at this point,” Mr. Royer said. “The capital will be available when we make acquisitions.”
Despite the stiff competition from consulting giants, including Accenture, Deloitte, KMPG and IBM, Mr. Marchand said the Caisse likes the digital transformation space, Levio’s ability to win new business and its successful M&A track record. He said the current cycle of large enterprises updating their digital infrastructure would likely last another five to seven years, at which point “there will be another cycle of capital expenditure tied to IT. We don’t see a short shelf life” for the opportunity.