About Me

My photo
Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Wednesday, September 14, 2016

$EVI Acquisition: Brief Readthrough on WSD Deal + 8x ProForma Valuation

I first wrote about EVI here when I believed it to be the kind of well run company that I wanted to own forever; niche business that generates cash, functions in a kind of protected duopoly and doesn't dilute shareholders. I had behind me decades of financial statements as evidence that the business was a lock box for cash. It was a $16M mkt cap company.

Then, Henry Nahmad acquired a controlling interest in the company and he was pretty upfront that nothing / everything would change.

He'd keep the core business roughly the same but roll up the industry the way his uncle / father rolled up the HVAC industry ~40 years ago to create $WSO. Not a bad pedigree; WSO has returned +12,000% over the last 30 years.

And then nothing happened ...

... until the first week of Labor Day 2016 when the company announced its first deal to acquire Western State Design, a primarily West Coast distributor of industrial and coin/op laundry equipment, for $28M. WSD was privately held and owned by Dennis Mack and Tom Marks. With this first deal done, Nahmad can now be judged on his actions not his pedigree. 

This is a short summary of my reading on the deal.

Price / Structure / Value 

The deal has a headline $28M purchase price split between $18M in cash and $10M in stock. But there's more to the story than the headline ...


The $18M in cash comes from 1.29M shares sold to Nahmad's investment vehicle Symmetric LLC in a PIPE @ $4.65 / share (the close price before the deal closed) + $12M from a newly announced credit facility. The total size of the credit facility is $20M.

Of this cash, $15.2M is paid at the close and $2.8M will be escrowed until 18-mos after deal; this appears to be related to and contingent on collection of AR's at the time of the deal

The purchase price includes 2.04M shares of stock worth $10M based on the average closing price of the stock for the 10-days prior to the Asset Purchase Agreement. Mssrs Mack and Marks - the sellers - will own just south of 20% of the combined company after the deal.

+/- what appears to be standard working capital adjustments from the baseline $4.8M working capital at time of the deal.

Western State Design did $60M in sales last year vs $30M for the core EVI. The company, it should be noted, is tripling in size. Operationally, WSD appears to be more heavily weighted towards coin op than the commercial laundry equipment / boilers that EVI distributes. Also, there appears to be no overlap in regions as WSD is mostly out West and EVI in Florida / Caribbean / Central America.

WSD has more gov't contract / federal work than EVI and apparently has security clearances related to that work that will be transferred in the deal; (what kind of security clearance is required to do laundry?). Very little information is available though it at they are at least savvy enough to protest an award (FWIW).

Based on WSD's $60M sales figure and assuming roughly the same EBITDA margins as the core business, EVI is acquiring a company twice its size at 5x-6x EBITDA.




Before the deal EVI was trading at ~$4 / share or ~10x trailing EBITDA. Proforma it appears to be trading for ~8x proforma EBITDA.



The $12M in borrowings to fund the deal is part of a larger $20M credit facility with Wells Fargo, so they have access to an additional $8M in borrowings. Perhaps other deals are pending as well ... 

A bit about Western Design and its owners / sellers, Dennis Mack and Tom Marks

Mack and Marks are co-owners of the firm. Not much information available about them, strangely enough in this day and age of social media. Would like to learn more and probably will have a chance to meet them at the shareholder meeting in Nov, as they will both become execs of the company and at least one will serve on the board.

In the standard non-compete provision, there is a carve out for a business run by Dennis Mack: "The foregoing prohibition shall not apply to the involvement in any manner by Dennis Mack with respect to Associated Laundry Management, a commercial laundry  in Reno, Nevada." Maybe he has a lab underneath it.

Another irrelevent tidbit: EVI is not acquiring the facility of WSD's headquarters on Tripaldi Way in Hayward, CA, but rather signing a new lease with the existing landlord. That existing landlord is TylerTown LLC, an entity created in 2012 by the controller of WSD, Marianne Lenci, so like EVI itself, WSD pays rents to its CEO.

It's not an unusual situation - lots of companies do this - and its critical for investors who tend to dismiss such things as "inside dealing" to reflect and consider what's actually important information in making an investment decisions. I don't think this is.

Why am I scraping the Department of State filings to get information on this company? B/c I can't really find anything else material.

But as a sense of what kind of managers are Mssrs Marks and Mack, I found this interesting. In 2010 they had plans to develop on spec a "state-of-the-art commercial laundry for sale or lease to an operator, the company says. The building site encompasses 3.87 acres and includes a 14,000-square-foot enclosed service yard. It is strategically located for effective distribution throughout Northern California."

The risks for building on spec were somewhat offset by their ability to get funding from a state issued bond on the deal.

The point is, we know our new fellow shareholders and managers have a nose for opportunity. And they were willing to take 35% of their comp in stock. This reinforces that assumption and provides some affirmative bias that as with already existing shareholders, they see long term opportunity in the business.

-- END --

THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES. FOR EDUCATIONAL PURPOSES ONLY. THIS INFORMATION IS BASED ON MY READING OF PUBLIC FILINGS AND MIGHT BE INCOMPLETE OR JUST PLAIN WRONG.

6 comments:

  1. Loving the story in this stock.

    Cant quite get to your $9m TTM EBITDA. The business will probably do about $3m this year which includes a large project. The business acquired will add about $5.0m. There are no synergies and there might be some central cost additions to build out infrastructure. So PF is $8m and might be slightly lower if core margins normalise / you take out large project. Can you help me with your thoughts?

    A second question. The stock is another painful lesson in short termism. I sold in mid 4s (with what seemed like good profit) because nothing was happening on the deal front. Stupid. Looking forward, what do you think is the market size / how far can this acquisition strategy go? I know the market is fragmented and have read the comments in the AR. Have you managed to quantify the opportunity? Is this a spectacularly large deal in the industry or can they do this size every year etc?

    ReplyDelete
    Replies
    1. Hi Alex

      Thanks for reading. I just dialed in a 10% EBITDA margin on a combined $90M revs to get a baseline run rate (not TTM for proforma). If they do 8% it's obviously $7.2M EBITDA and trading at ~10x. It's just a back of the envelope calculation.

      I have observed that a stock that goes up and a stock that goes down causes the same emotional impulse to "do something". However, value - our perceptions or calculations of it or whatnot - and value alone should drive investment decisions.

      When we take cues from price signals (it's down! it's up!) and act on the natural impulses to "do something", I believe that to be a sucker's game always.

      My point is, if you're having another "painful lesson" then logic dictates you've not actually learned that lesson.

      I have many examples of the same mistake you're acknowledging (and no better way to change it then by owning it first!) but my favorite is that I once owned SEB at $300 and sold it at $700 when nothing had changed with the business, my expectations for its growth, the capability of mgmt, etc.

      I am a more patient investor now and have learned that unless I see something materially changing averse to my expectations in the way a business is run, its industry, its operations, mgmt, etc. then there should never be any reason to sell it, unless it so enamored by other investors that its multiple reflects unrealistic expectations on an unreasonable future.

      Delete
  2. Thanks

    Any idea on the EVI TAM / M&A runway?

    ReplyDelete
    Replies
    1. There is floating around somewhere that I have seen a report that covers the TAM for this industry. I don't believe TAM to be as important a figure as changes to TAM and so I haven't spent much time on the report but it might be on seeking alpha.

      I find it more important to simply Identify the drivers of commercial / institutional laundry; hotel occupancy and employment, incarcerations, university and hospital construction, etc. and then assess the state of and chgs to them. I imagine declining incarceration levels is a net negative, everything else sort of flat, and +/- cyclicality.

      Delete
    2. Any takeaways from the shareholder meeting? I believe you had said that you were going to attend.

      Delete
    3. takeaways? lots more hedge funds there than last year. Mssrs Steiner, Mack and Marks (legacy EVI + acquired WSD) have incredible expertise, experience and perspective in the business, industry and they know everyone in it, etc.

      still in market for acqs, playing long game, etc.

      Delete