September 14th, 2010
Inside the Associated Materials Acquisition
On September 8, the definitive agreement by which Hellman & Friedman LLC, a private equity firm, will acquire Associated Materials Inc., a manufacturer and distributor of exterior building products, was announced. Its various holdings included Alside and Gentek. The total price paid for Associated Materials was $1.48 billion, when accounting for the cash to be paid, as well as the value of liabilities to be assumed.
Public filings show that Associated generated some $130.27 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the 12 months prior to the transaction, implying an EBITDA multiple of 11.4 times. This is higher than the typical EBITDA multiple paid for a profitable building products manufacturer, which usually ranges from four to eight times EBITDA, depending upon a number of factors. However, I believe that the multiple is justified in this case for several reasons, which I’ve highlighted below.
Sheer Size: With an adjusted EBITDA (a proxy for cash flow) of $130 million, Associated belonged to a relatively small group of companies capable of throwing off this much cash flow. These types of companies aren’t put up for sale everyday, so their scarcity tends to garner a size premium for the selling owners.
Growth: For the 6 months ending July 3, 2010, the company’s revenues were some $532.6 million, up 19 percent from the same period in 2009, when revenues were $447.3 million. During the same time period, adjusted (EBITDA) increased by 2.6 times, from $19.9 million to $51.9 million. In a market that is facing considerable challenges, this type of growth would definitely qualify a company for a premium multiple. If a company performed this well under duress, how strong will its performance be in a more normal market?
Profitability: In addition to the absolute level of the EBITDA, buyers are interested in the amount of revenues that are converted into cash flow. This measure, known as the EBITDA margin, is calculated by dividing EBITDA by revenues. In the case of Associated, EBITDA for the trailing 12 months was $130.3 million, while revenues were $1,131.4 million, for an EBITDA margin of 11.5 percent.
This means that roughly 11 ½ cents of every dollar of Associated’s revenue dropped to the bottom line as cash flow. In the building products industry, a 10 percent EBITDA margin is indicative of a strong performer, one with a product that is sought after and not competing based upon price. Any company that exceeds a 10 percent margin is likely to qualify for a premium when it is sold.
Dialing in all of these factors, it appears that Hellman & Friedman paid a full valuation for Associated Materials, but not an unreasonably high one.