On the surface, you may wonder why Generac, a company known for making home standby and portable generators, is buying ecobee, a company known for its work in developing smart thermostats.
The thermostat market, after all, is full of big players like Google’s Nest, Honeywell and Johnson Controls. Why get into the thermostat business?
“That’s a pretty, frankly, myopic view of what we’re getting into,” Aaron Jagdfeld told analysts on Generac’s earnings call Tuesday. “What we’re getting into is the home energy ecosystem.”
Generac said Monday it plans to acquire Toronto-based ecobee for $200 million in cash and $450 million in stock. The $650 million purchase price could climb to $770 million by 2023 depending on the number of connected homes ecobee is in and its annual recurring revenue.
The acquisition, which is expected to close later this quarter, is the latest in a series of acquisitions Generac has made is it expands beyond generators into energy technology and clean energy. This year alone the company acquired assets in microinverters and monitoring for the solar market, a smart water heater device maker and a propane tank monitoring solution.
Generac also bought distributed energy software firm Enbala in 2020 and Pika Energy, a maker of battery storage systems, in 2019.
The company is aiming for residential energy technology to be 17% of its sales by 2024, up from 7% currently.
Jagdfeld, president and chief executive officer of Generac, said thermostats, water heater controllers and electrical load management devices can help both homeowners and electricity providers when they are part of a connected system.
“They’re relatively small, but they add a tremendous amount of value,” he said, repeatedly noting that HVAC equipment is the largest user of power in a home.
Jagdfeld said ecobee offers the company a “middle layer” that will help to bring all the different energy technology devices together.
“It gives us a platform and it gives us a team of over 500 people up in Toronto that are steeped in user interfaces and user experiences that is what we need to bring all these assets together,” he said.
Jagdfeld also described ecobee as a startup that is just getting to scale. Its revenue of around $125 million is constrained by many of the supply chain challenges facing other companies using semiconductors, but could grow at 3x Generac’s long-range plans. Generac is targeting 13% to 15% compound annual growth through 2024, according to its latest investor presentation.
He added that ecobee is still in “investment mode” and generating operating losses but Generac plans to continue making necessary investments to fuel the company’s growth.
“It’s probably going to be a couple years before they’re break even, but that doesn’t worry us,” Jagdfeld said.
Generac has been busy on the acquisition front, buying six companies this year if the ecobee deal closes on time. Jagdfeld said the company didn’t set out to do that many deals in 2021.
“The timing of those deals, we generally don’t dictate,” he said, adding the company had been able to handle them in part because they have spread throughout its businesses.
Jagdfeld also pushed back against the idea that Generac is seeking to acquire revenue or sales growth with its flurry of deals. Acquisitions are expected to generate about 5 percentage points of the 47% to 50% sales growth the company expects for the full year.
“We use acquisitions to accelerate strategy,” Jagdfeld said.