Construction Materials

Question 1

Explain MM leveraged finance environment

Answer 1

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

Question 2

Explain the MM M&A Environment

Answer 2

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

Question 3

Explain trends in the construction industry

Answer 3

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

Question 4

What were the refinancing and timing considerations you looked at?

Answer 4

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

Question 5

What did you reccommend and why?

Answer 5

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

Question 6

What were the comps? Walk through them

Answer 6

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

Question 7

Why did your company have a multiple premium over the geosynthetic comps?

Answer 7

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

Question 8

What were the precedents?

Answer 8

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

Question 9

What was the final valuation range?

Answer 9

Now = 420-500

End of Year = 500-580

Question 10

How did the different methodologies differ?

Answer 10

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

Question 11

What were the drivers of growth

Answer 11

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%

Question 12

What are current gross profit, EBITDA, and EBIT margins?

Answer 12

GP = 47%
EBITDA = 24%
EBIT = 15.5%

Question 13

What were exit gross profit, EBITDA, and EBIT margins?

Answer 13

GP = 46%
EBITDA = 25%
EBIT = 17.5%

Question 14

What were the revenue and EBITDA growth rates

Answer 14

~6-7% per year

Question 15

Explain the capex requirements of the business

Answer 15

Modest at 5-7mm per year

In near-term, 50% is growth but 2015 onwards is entirely maintenance capex

Question 16

Walk through the sources and uses

Answer 16

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

Question 17

What were the debt details?

Answer 17

Revolver/Term Loan = L+450, 1.25% floor

Second Lien = L+850, 1.25% Floor

Question 18

What were the credit statistics?

Answer 18

Debt/EBITDA was 5.0x and decreased to 2.0x at exit

EBITDA/interest was 3.0x initially and 6.0x at exit

Question 19

What was the capital structure pre-transaction?

Answer 19

$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

Question 20

What was the capital structure post-transaction?

Answer 20

~35% term loan
~ 20% second lien
~45% equity (with 10% mgmt options)

Question 21

What was LTM EBITA at entry of both scenarios?

Answer 21

Now: $52mm
FYE: $62mm

Question 22

What was LTM EBITDA at exit of both scenarios?

Answer 22

Now: $82mm
FYE: $85mm

Question 23

How much debt was raised in the transaction

Answer 23

Now = $260mm
FYE = $310mm

+10mm EBITDA x 5 leverage

Question 24

What was the equity purchase in both scenarios?

Answer 24

Now = $220
FYE = $310

+10mm x 9 EBITDA

Question 25

What was LTM revenue at entrance?

Answer 25

Now = $210
FYE = $245

Question 26

What was LTM revenue at exit?

Answer 26

Now = $320
FYE = $335

Question 27

What was the IRR?

Answer 27

now ~20%

FYE = 17.5%

Question 28

What is their market share?

Answer 28

37%, #1 US market share per segment

Question 29

What regions account for the most sales?

Answer 29

1) US =60%
2) EUR = 25%
3) ASIA = 10%