Neither gas or liquid can get where it needs to go unless it’s directed. That’s what Halifax Group’s latest investment is all about. Earlier this month, the private equity firm agreed to acquire the polyethylene pipe and pipe liner operations from Rinker Group Ltd. for approximately $65 million.
PolyPipe, as the Rinker subsidiary is known, produces small- to large-diameter high- and medium-density polyethylene pressure pipe used in end markets including general industry, water and wastewater, oil and gas production and natural gas distribution. Based in Gainesville, Texas, with six plants across the U.S., PolyPipe currently holds the number-two market share among national manufacturers of polyethylene pressure pipe in the country.
A research note published by Macquarie Research Equities estimated that PolyPipe has revenues of between $80 million and $90 million and an EBIT of approximately $10 million. “This suggests an EBIT multiple of 6.5x. A fair but not exceptional price,” the note concluded.
For Rinker, the Australia-based seller of PolyPipe, the deal’s $65 million price tag earns the company an approximate $8 million premium on the division’s book value, the company said. Rinker has recently been divesting divisions it regards as non-core to its heavy building materials focus. Last month, the company sold its Prestress concrete manufacturing business to Coreslab Structures. Cash proceeds of that sale, including working capital, were about $45 million. The Prestress sale price was below book value, resulting in a non-cash pre-tax book loss of approximately $15 million, according to Rinker.
The pipe industry as a whole is a pretty slow grower; about 1% to 2% per year. But dissect the industry into its respective building components, and Halifax’s attraction to the space becomes more apparent. The slow growth of the pipe space can mostly be attributed to the production and sale of metal pipe, which makes up a large portion of the industry but does not offer much on the developmental side. Now, enter the synthetic side of the industry. The plastic pipe niche sees between 3% and 5% of industry-wide growth per year. Focus the lens even further to a particular breed of plastic-polyethylene-and you now have a pipe product that sees 7% to 8% of industry volume growth per year, said Brent Williams, a managing director at Halifax. “Polyethylene pipes have 100% joint integrity. They are joined together by a process called polyethylene fusion, which-put simply-is the melting together of multiple pipes to create one seamless pipe.” The process, he explained, is faster and more efficient than working with metal pipes.
Cast iron and steel pipes are often either welded together or twisted together by threaded edges. Because metal is not as flexible as polyethylene and is more sensitive to temperature fluctuation, breaks and leaks are more common among metal pipes than their synthetic counterparts. During his research of the space, Williams said he found data concluding that up to 15% of the water-both fresh and waste-traveling through the older cast iron and steel pipes ends up escaping back into the ground because of leaks.
The PolyPipe transaction is expected to close later in the first quarter. David Fordyce, currently the vice president of PolyPipe, will become CEO of the company upon completion of the transaction. Other existing senior management and employees are expected to remain with the company following closing of the deal.
According to Venture Economics (publisher of Buyouts) Halifax is currently investing out of its vintage-1999 inaugural fund, the $200 million Halifax Capital Partners LP.