Associated Materials LLC, a building materials maker based in Cuyahoga Falls, Ohio, seems to be looking at the world through rose-colored glasses. At least, that's the impression several private equity firms have had as they consider bidding for the company.
Associated, which is owned by Harvest Partners and Investcorp, is looking to sell itself for around $1.3 billion, sources said. That amounts to a multiple of around 9 times projected Ebitda, according to sources. While that number may seem high, especially for a company whose fate is tied to the still-struggling housing market, consider for a moment the company's projections, as outlined in the pitch book given to prospective bidders for the company.
The company, with Ebitda totaling $100 million in 2009, projects that its cash flow for 2010 will be $149 million. Not only is that almost 50% higher than last year, it's 20% higher than the $123.9 million the company reported in 2006, the peak year for the housing bubble.
"We're not seeing enough signs of improvement in housing to justify any of those numbers," said one partner at a private equity firm that looked at Associated's projections and walked away from the auction. "The only conceivable way those would work is through a really steep recovery in the housing market, but we're not out of the woods yet."
It's perhaps obvious as to what is motivating Associated's owners in their optimistic projections. If Associated fetches $1.3 billion, the company's owners would pocket about $640 million in proceeds after $658 million of consolidated long-term debt is netted out. Investcorp, a 50% owner, would earn about a $170 million, or 113%, gain on the $150 million it invested. Another $320 million in proceeds would go to New York-based Harvest Partners and other investors.
Less clear, however, is why the company is attracting such interest. Sources said that remaining bidders include Clayton Dubilier & Rice LLC, Hellman & Friedman LLC, CVC Capital Partners, TPG Capital and Madison Dearborn Partners.
"It's a cyclical play," a source said. "It's a bet on the market rebounding."
The fact that the housing market has likely bottomed, which suggests a company that supplies new housing construction can only look to increased revenue, does help Associated's cause. But also helpful is the fact that buyers themselves are hungry to do deals. The $425 billion in unused capital that private equity firms need to put to work in the next couple of years is likely to be a significant factor in this deal and many others. Few buyout firms are willing to return their capital to investors, and their rush to put the money to work could mean more questionable dealmaking in months ahead.
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