Construction Materials Flashcards
Explain MM leveraged finance environment
1) Increasing volume and transactions in each of the past 5 quarters (Q4 = $3Bn, 30)
2) Increasing Leverage multiples - highest since 2006/2007 (Q4 2012 = 5.0x)
3) Near record-low all-in costs - from Q1 to Q4 levered loan spreads L+600 to L+450
Explain the MM M&A Environment
1) Increased Deal Activity - Highest level since Q4 2007, Q4’12 was up 50% from Q1-Q3
2) 2013 expected to be strong
- stock market all-time high, positive momentum
- huge cash reserves ($2 Tn corporations, $400 Bn PE firms)
- still macro uncertainties but greatly diminished vs 2012
Explain trends in the construction industry
1) MAP-21 could further improve results - passed last summer and authorizes hwy/transit investments through 2014 ($40 Bn/year)
2) Fiscal Cliff negotiatoins added to uncertainty as states were hesistant to commit to long-term projects
3) Federal highway obligations increased ~90% YoY in Q4, which suggests increased highway award activity
What were the refinancing and timing considerations you looked at?
We pretty much broke it down into 4 strategic options
1) refinance 1st lien now, sell 2014/2015
2) refinance entire cap structure, sell later
3) launch sale asap
4) launch sale in fall
What did you reccommend and why?
Launching a sales process in the fall made the most sense. Refinancing and selling the company later involves alot of inherant risks and downsides
- rebound in performance does not occur
- weakened M&A/financing markets
- expenses of refinancing
Selling now also had the major downside of
- LTM EBITDA very low ,expected to have huge short-term upswing in terms of LTM EBITDA to sell company off stronger results
What were the comps? Walk through them
Used several categories as no good “pure-play” public corporations. Broken down into several classes
1) Geosynthetics - 6.0x EBITDA
2) Aggregates - 15.0x EBITDA
3) Cement - 9.0x
4) civil construction - 7.0x
Final valuation range = 7-8x
Why did your company have a multiple premium over the geosynthetic comps?
Wanted to consider all categories in final range. Premium given because company EBITDA margins are ~25% while the geosynthetics were closer to ~10%. These margins are more in line with aggregates, so we gave a higher multiple
What were the precedents?
Analyzed precedent transactions in same fields. Major transactions include Low & Bonar/Collbond, Propex/ SI Corp, and the acquisition of our company
Range came out to 8.0x-9.25x
What was the final valuation range?
Now = 420-500
End of Year = 500-580
How did the different methodologies differ?
1) DCF 500-590 now - intrinsic value, projections based largely on management input
2) Precedents 495-575 FYE
3) Trading Comps 460-525 FYE
4) LBO 450-520 FYE
What were the drivers of growth
1) Unit Volume (6-7%)
2) Price ( < 1%)
3) Inflation 2.5% - 3.0%
4) Resin Prices 2-3%
5) Manufacturing productivity 3%
6) SG&A / Overhead productivity 5%
What are current gross profit, EBITDA, and EBIT margins?
GP = 47% EBITDA = 24% EBIT = 15.5%
What were exit gross profit, EBITDA, and EBIT margins?
GP = 46% EBITDA = 25% EBIT = 17.5%
What were the revenue and EBITDA growth rates
~6-7% per year
Explain the capex requirements of the business
Modest at 5-7mm per year
In near-term, 50% is growth but 2015 onwards is entirely maintenance capex
Walk through the sources and uses
Sources - assumed leverage of 5.0x (3.25x senior and 1.75x junior) which accounted for ~55% of the sources with the remainder coming from an equity check
Uses - target equity accounted for ~55% of the uses, a few percentage points allocated to fees/transaction expenses and close to 45% of the uses was refinancing target debt
What were the debt details?
Revolver/Term Loan = L+450, 1.25% floor
Second Lien = L+850, 1.25% Floor
What were the credit statistics?
Debt/EBITDA was 5.0x and decreased to 2.0x at exit
EBITDA/interest was 3.0x initially and 6.0x at exit
What was the capital structure pre-transaction?
$120mm TL, 750 bps
$120mm 2nd lien TL, 1100 bps
$210mm preffered equity paying 21%, 8%, 8% dividends to 3 sponsors
common shares owned by sponsors and 10% mgmt options
What was the capital structure post-transaction?
~35% term loan
~ 20% second lien
~45% equity (with 10% mgmt options)
What was LTM EBITA at entry of both scenarios?
Now: $52mm
FYE: $62mm
What was LTM EBITDA at exit of both scenarios?
Now: $82mm
FYE: $85mm
How much debt was raised in the transaction
Now = $260mm FYE = $310mm
+10mm EBITDA x 5 leverage
What was the equity purchase in both scenarios?
Now = $220 FYE = $310
+10mm x 9 EBITDA
