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Thursday, 13 December 2012
DealNet poised to create a niche in an underserved market
It’s been just over a month since DealNet Capital Corp. (CNSX: DLS) (OTC PINK: GAIMF) launched its new business strategy, and with the recent closing of a $625,000 private placement and a debenture offering that will raise $1.5 million, the merchant banking company is ready to hit the ground running.
DealNet, previously called GameCorp, recently transitioned from the gaming industry to heating ventilation and air conditioning (HVAC) financing and services, water heater rentals and business process outsourcing (BPO), with the infrastructure of the BPO business underpinning the HVAC delivery platform.
The new funds it has gathered will be used to move forward with the growth plans for OC Communications Group (OCCGI), DealNet's recently acquired BPO subsidiary.
The money will also be used to launch One Dealer, a business designed to provide end-to-end customer management and financing services to the HVAC industry through a network of HVAC dealers.
The company’s business model allows for “sustainable and predictable revenue generation” through its BPO segment, according to Ubika Research analyst Vikas Ranjan, which has been leveraged to enter the North American HVAC financing and servicing market, as well as the water heater rental business.
President of the company, Bob Cariglia, says that the company generated a lot of interest through its private placement, and he believes the debenture offering should be completed within a short time.
“It’s really going to provide the growth capital we need and it provides particular support to closing the Home Service Company acquisition previously announced,” he says.
Cariglia joined DealNet in February of this year, and officially assumed the role of president in September.
In May, the company acquired OCCGI - an "established player in the BPO industry, generating robust, recurring and predictable profits”, commented Ubika’s Ranjan in a recent research note.
"Our BPO business, primarily providing call-center services, is a great asset with a great pipeline,” adds Cariglia.
Cariglia, along with chief operating officer Michael Hilmer, have many years of experience in the BPO realm and have been able to use their connections with the HVAC industry to support dealers through DealNet’s BPO call-center business.
Historically, the BPO would bid against larger companies on call center outsourcing, credit management and underwriting facilitation, home services or back office outsourcing within the HVAC space.
The new strategy, One Dealer, means the BPO provides the end-to-end capability, including financing capital, providing for “terrific advantages in the space”, while enhancing the offerings of HVAC companies.
“By taking a full service and market view of the HVAC industry, we can create significant ongoing demand on a recurring basis without having to suffer through the long sale cycles often found in outsourcing,” says Cariglia.
Likening the HVAC industry to a similar situation, where “big box” stores have all but wiped out the local hardware store market, Cariglia says smaller players in the HVAC industry have difficulty competing against “utility attached HVAC companies” that are able to attract low cost pricing and capital.
Once an HVAC dealer is attached to the One Dealer network, it will be able to attract more customers, close more deals and drive greater revenue and profit, therefore driving longevity and value into its company.
In fact, Cariglia says the marriage of the BPO call center and the HVAC industry has shown such progress that DealNet opened two new facilities – in Ft. Meyers, Florida and Reno, Nevada - to service large retail customers in the U.S.
“A U.S. presence is important in the outsourcing industry,” notes Cariglia.
“We are now well positioned to look after certain verticals and HVAC is the first one we’re going for as an in-house business.”
Through One Dealer, DealNet plans to bring together more than 80,000 small and intermediate-sized dealers in the North American HVAC and water heater rental industry under one umbrella.
One Dealer is expected to help these dealers provide a better customer experience by leveraging fractional call center time through the BPO unit, and at the same time "authorize and encourage them to sell DealNet’s finance products and services”.
DealNet therefore plans to position itself between the dealers and the end customers, earning profit from both. One Dealer is slated to launch in first quarter 2013.
At the same time, Cariglia says DealNet will continue to look at other outsourcing opportunities.
“It’s a huge, growing market,” he explains.
“The outsourcing industry will continue to explode over the next 10 years.”
As part of the company’s growth, in September DealNet announced the planned acquisition of Atlanta-based Home Services Company (HSC), which provides HVAC after-market protection plans to homeowners in the greater Atlanta area.
“It’s a really nice piece that gives us an in-house service offering and gives our dealers an additional product to sell,” says Cariglia.
The company recently renegotiated and revised the terms of the Atlanta acquisition, with the consideration at closing being $50,000 in common shares and deferred payments of $100,000 in stock due when HSC achieves certain customer targets.
There will also be an earn-out cash payment of $7.50 per qualified customer, with the earn-out capped at a maximum of $140,000 over a period of two years.
With the addition of the Atlanta company, Cariglia says “all the pieces are coming together nicely” for DealNet.
The CEO emphasizes that financing and servicing HVAC equipment is a key aspect of DealNet’s success.
“Here in Ontario, approximately four million people actually rent their water heaters, with the lion's share of that market spread between less than five providers, meaning less competition for consumers, and more challenges for HVAC companies attempting to service this market,” Cariglia points out.
He adds that the interest rate on renting the units, along with the fact that most people finance their new buys, means there is a nice spread to be made in the business.
Furthermore, larger banks – which are in the business of financing - typically are hesitant with smaller dealers. Enter DealNet, which uses its expertise and existing relationships with smaller dealers to provide financing through a unique contract and consumer relationship structure.
Cariglia says financing this type of equipment is great, because it is tied to people’s homes.
“People will almost always pay their utilities first,” he explains, adding that this results in a low default rate among customers.
There is also the opportunity to grow the rental business in North America, says Cariglia.
“The rental business is more popular in Ontario than anywhere else, but there is interest outside the province. “We think it is a business model that would work really well in the U.S.”
Entering the heating and cooling financing business has given the company an opportunity to build a niche for itself as small dealers struggle to stay independent and welcome DealNet’s knowledge in the under-served market.
“And, this model fits in well within a number of verticals,” Cariglia says.
Looking ahead, Cariglia points out that the new Reno facility gives the company a definite “leg up” as far as expanding into the western U.S., and with the closing of the Home Services Company acquisition, Georgia will become a significant priority, with Ontario being a key launch market.
DealNet is also on track to strengthen its sales and customer services reach in the southern U.S., after it recently secured an early renewal and contract extension with a Texas-based utility provider.
Its BPO subsidiary, OCCGI, will continue to manage all aspects of sales and customer service for the Texas-based utility service provider, including account management, payments, escalations, acquisitions and retention.
With the original contract set to expire in February 2013, the U.S. utility provider has contracted the BPO segment to deliver services over the next two years, running through November 2014.
As DealNet heads into 2013, Cariglia says it is building an “exceptional and experienced management” team to help build the company out.
“We are well funded, have a healthy cash flow and there is great interest in our business model,” he concludes.
“In January, it is all about execution.
“The key for 2013 is launching our One Dealer offering suite, which is progressing very well, and then scaling into the massive dealer network.
"With that scaling, we will see the fruits of those labours financially through late 2013 and into 2014, when the value of what we create in 2013 yields long term income.”