The First Leveraged Buyout Of 2015 Hits The Public Markets
Amid a quiet IPO market in the first quarter of 2015, attention this week shifts to Blackstone-backed construction materials company Summit Materials SUM.
As the old cliché goes "timing is everything," and with the construction business on the rebound, now may be the perfect time for the conglomerate. The company, based in Denver, CO, went public this Thursday.
The stock opened at $20.16 on the New York Stock Exchange. Shares have since risen slightly higher, and are up more than 12 percent on the day.
Summit Materials, formed by Blackstone in 2009, is a group of building material assets. Its strategy is to acquire and grow building companies in the aggregates, ready-mix concretes, cement, asphalt paving, and construction industries. It has since acquired 34 companies and consolidated the group into 11 companies within its portfolio.
Summit established itself as a top 10 U.S. supplier of aggregates by volume in the residential, commercial, and public construction markets.
With the housing market rebounding, building materials like stone and gravel present an opportunity for investment.
A recent February 2015 Barron's article featured competitor Vulcan Materials VMC. The article mentioned the improvement in the housing market and the company saw a rise in demand as the company experienced a 15 percent jump year over year in 4th quarter shipments.
High Growth Comes with High Costs
As one of the fastest growing construction materials companies in the country, revenue increased 197 percent since December 2010 to December 2014 compared with average revenue increase of 38 percent from competitors. Summit's revenue in the last 12 months was $1.2 billion versus December 2013 revenue of $916 million.
A contributor to Summit's revenue growth is the company's aggressive acquisition strategy, with deals being funded through equity commitments and debt financing. These buys have added to the company's debt of $1.06 billion.
The company has still yet to make a profit. Net income as of December 2014 was a net loss $6.28 million which is a major improvement compared to previous net losses of $104 million in December 2013. EBITDA margin is 13 percent and poised to continue upward with the rebound in the construction market.
Summit employs 4,500 people across the nation, doing business in 17 states with a major focus on Texas, Kansas, Kentucky, Missouri and Utah. The company effectively utilizes vertical integration to supply its customers with heavy-side construction materials and related products.
Private Equity Backing
Summit was initially started with the backing of private equity and investment firms The Blackstone Group and Silverhawk Capital Partners. Blackstone will still own up to 75 percent majority of the company and closely linked to the firm's interest. The typical private equity route is to hold the firm's assets until it can exit out at a profit. Investors should look for signs when the company begins selling off its stakes -- most likely when Summit starts consistently turning a profit.
It could be sooner than later with data from the National Association of Home Builders noting housing starts are estimated to grow by 57 percent between 2013 and 2016. At the same time, nonresidential private construction is expected to rise by 26 percent. With public infrastructure aging, Summit feels they can support its business long-term. The firm's large presence should be a contributing factor in its ability to win business in future profitable projects.
Competitors such as Martin Marietta Materials MLM and Vulcan Materials Company (mentioned above) have performed well lately. Advanced Draining System which was the most recent construction supply company IPO traded up 74 percent since its July 2014 debut.
Conclusion and Pricing Info
The company appears to have a strong growth strategy that serves major markets on the rebound with an experienced management team. If current trends continue, it could further boost profits and expand its market share going forward.
The debt level is a little worrisome. Summit plans to use of the proceeds to pay down debt, but if the company raises around $400 million, there will still be plenty of debt left. Investors should monitor the company over the coming quarters.
As always, investors should consider their risks and objectives before making any decision to purchase an IPO. The offering included underwriters Citigroup, Goldman, Sachs, & Co., BofA Merrill Lynch, and Barclays.
Disclosure: At the time of writing, the author holds no positions in any of the above mentioned securities.
Image credit: Till Krech, Wikimedia
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