Synalloy Corporation
SYNL, a growth oriented company that engages in a number of diverse
business activities including the production of stainless steel pipe,
fiberglass and steel storage tanks, and specialty chemicals, and the master
distribution of seamless carbon pipe and tube, announced today that it
delivered a non-binding preliminary indication of interest (the "Indication of
Interest") to The Eastern Company ("Eastern").
The full text of the Indication of Interest delivered to Eastern follows:
January 2, 2015
Personal and Confidential
Mr. Leonard F. Leganza
Chairman, President and CEO
The Eastern Company
112 Bridge Street
Naugatuck, CT 06770
Dear Mr. Leganza:
I am writing to you to express my company's interest in the possible
acquisition of The Eastern Company. A copy of this letter is also being
distributed to Eastern's largest shareholders. Synalloy Corporation
SYNL is a holding company for a diverse group of manufacturing
businesses. Synalloy's five operating companies include BRISMET, a producer of
stainless steel and special alloy pipe; Specialty Pipe & Tube, a master
distributor of seamless carbon pipe and tube; Palmer, a manufacturer of steel
and fiberglass storage tanks; and Manufacturers Chemicals and CRI Tolling,
which provide contract manufacturing support to the chemical industry. Our
facilities employ both union and non-union labor. Like Eastern, Synalloy's
operating businesses have a storied past, reaching back as far as the early
1900's. Each of our operating companies has its own management team, while
Synalloy's corporate group of fewer than 15 individuals provides support to
the business units and works to execute the holding company's long-term
strategy.
For most of its history, Synalloy was content to remain a micro-cap public
company. The stock traded by appointment and had virtually no following in the
investment community. There was very little liquidity in the stock, making it
difficult for large investors to build or exit their positions without moving
the stock price up or down materially. With the advent of Sarbanes-Oxley, the
cost of being a public company increased dramatically, adding further to the
challenges of being a micro-cap company. In considering our options, only one
truly made sense…grow Synalloy into a small-cap company. Taking the company
private would have burdened it with excessive levels of debt. Selling off the
operating companies one by one would be tax inefficient and would have
resulted in less realized value for all of our shareholders.
The strategy that I outlined for our Board of Directors upon my appointment as
President and CEO back in January 2011, was to embark on a growth plan which
included not only organic growth of our existing businesses but the active
pursuit of acquisitions that met certain criteria. We determined that at a
minimum, Synalloy should set a goal of $500 million in annual revenue and $60
million in EBITDA. We believed that by achieving this goal, our market cap
could exceed $400 million, opening our stock to many more investors and
substantially increasing the liquidity of our shares.
Over the past four years, Synalloy's management team has been focused on
accomplishing this goal. We have completed three acquisitions with a combined
transaction value of over $70 million, and divested our under-performing pipe
fabrication business. In September of last year, we completed a follow-on
stock offering which raised $36 million and brought us several new
institutional investors.
Following our acquisition of Specialty Pipe & Tube in November, our projected
net debt to EBITDA for 2015 is less than 1.2 times. Almost all of our debt is
structured with either five or ten-year terms, at after-tax interest rates of
2.5%. Synalloy has ample capacity to take on additional debt for our next
transaction, while still maintaining a conservative balance sheet.
We have made excellent progress in not only growing the company, but improving
its profitability. Synalloy's EBITDA in 2010 was under $8 million and will
grow to a record $22 million in 2014. Including the Specialty Pipe & Tube
acquisition, we are projecting revenue in 2015 of $240 million and EBITDA of
approximately $30 million. Our EBITDA margins have improved from 5% in 2010 to
a projected 12.5% for 2015. This is after the burden of holding company
expenses.
After studying Eastern's history, operating businesses and holding company
structure, I see many similarities to Synalloy. I believe our respective
shareholders would be well served by a combination of our two
companies. Although there is certainly much to discuss and due diligence to be
conducted before we could move forward with a formal letter of intent, I want
to propose a potential deal structure that I believe could create substantial
value for both Synalloy's and Eastern's shareholders.
Based on Eastern's SEC filings, I would place an initial valuation of the
company at $119 million, or $19.12 per share. This assumes annual EBITDA of
$17 million ($15 million from the company as presently structured, plus $2
million of savings from the elimination of duplicate hold-co
expenses). Applying a multiple of seven times EBITDA generates a value of $119
million. Cash minus debt and pension/retirement obligations results in
additional value of $3 million. The total of $122 million is reduced by
approximately $3 million for change in control payments to Eastern executives
to arrive at the $119 million valuation. We recognize that through due
diligence, we may determine that EBITDA for 2015 is actually higher than our
assumption. If that is the case, we are prepared to assign a higher valuation
to the company.
As to deal structure, I envision Synalloy paying for the acquisition using
cash and Synalloy common stock. By including Synalloy common shares in the
purchase price, current shareholders of Eastern will have the opportunity to
participate in the additional value created by the combination of our two
companies. The cash portion of the purchase price would be in the range of 30%
to 40%, with Synalloy common stock representing 60% to 70%. Using the
mid-point of this range and assuming a price of $17.00 for each Synalloy
common share, Synalloy would issue .731 common shares for each Eastern share,
or a total of 4,550,000 common shares. Each share of Eastern stock would also
receive approximately $6.69 in cash, or a total of $41.65 million. Following
the transaction, there would be approximately 13.35 million common shares of
Synalloy stock outstanding on a fully diluted basis.
The combined company would have annual revenue of $381 million and EBITDA of
$48 million. Total debt would be $82 million. After making the change in
control payments to Eastern executives, cash would total $18 million,
resulting in net debt of $64 million. Net debt to EBITDA would be 1.34
times. Net debt and pension/retirement obligations to EBITDA would be 1.62
times. Net income for the new company would total $22.0 million, or $1.65 per
share.
The combined company would offer a number of benefits to both shareholder
groups:
o Valuing the company at 14 to 15 times earnings generates a share price of
$23 to $25. Valuing the company at 7.0 to 7.5 times EBITDA produces a
share price of $25 to $27.
o With 13.35 million shares outstanding, liquidity would be greatly improved
for all shareholders. Current large investors in either Synalloy or
Eastern could exit their positions in the future without putting downward
pressure on the stock price.
o With a potential market cap of $350 million, the company would be included
in the Russell 2000, resulting in a likely premium to its normal share
price and providing even greater liquidity for its shareholders. The 2014
market cap threshold for the Russell 2000 was $161 million, so inclusion
in this index would not be an on-again, off-again event, as it may be for
either company individually.
o Further diversification of our operating businesses and their end markets
would provide for more consistent earnings across all business cycles.
o With the increased scale of the combined entity, larger acquisitions could
be pursued in the future, further fueling growth and market cap expansion.
o It is likely that operating synergies would also be identified through the
coordinated efforts of the business unit management teams.
This opportunity has the potential to be transformative for both of our
organizations. I am excited to see if we can bring this to bear for all of our
shareholders. I would like to request a meeting with you at your earliest
convenience so that we may begin discussions. You may reach me at (804)
822-3261, or by email at cbram@synalloy.com. I look forward to hearing from
you.
Sincerely,
Craig C. Bram
President and CEO
Market News and Data brought to you by Benzinga APIs© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Loading...
Posted In: NewsPress Releases
Benzinga simplifies the market for smarter investing
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
Join Now: Free!
Already a member?Sign in