The exit strategy that Thomas H. Lee Partners and JPMorgan Partners had originally planned for National Waterworks Holdings Inc. involved nothing short of taking the company public. In April, the two firms filed an S-1 document with the Securities and Exchange Commission outlining their intent to raise approximately $400 million via an IPO of the water pipe and components distributor. That process, however, was derailed late last month when the duo accepted a $1.35 billion, all-cash offer for National Waterworks that was made by building products retail giant, The Home Depot Inc.
Though the change of exit strategy was not wholly attributed to market conditions, Todd Abbrecht, a managing director at TH Lee, told Buyouts that the “degree of volatility” exhibited by the public markets over the last six to nine months did play a factor. “There are risks with going public, and we felt this was a better option for our investors,” he said.
Home Depot expects the deal to be wrapped up by the end of August, at which point National Waterworks will be added to the retailer’s Home Depot Supply unit.
With 2004 net sales of $1.5 billion and EBITDA of $123.4million, National Waterworks distributes components such as pipes, valves, fire hydrants and service and repair products used to transport water to and from residential and commercial locations. The Waco, Texas-based company operates through a network of more than 130 branches in 36 states and sells directly to municipalities and contractors.
The waterworks transmission equipment distribution industry, as a whole, is an $11 billion market, said Home Depot Supply President Joe DeAngelo, in a conference call late last month. Of that, he added, the largest three players control about 33% of the fragmented market, with National Waterworks boasting a 14% share.
JPMP and TH Lee acquired National Waterworks from U.S. Filter Corp. in November 2002 for $660 million, including transaction-related fees and expenses. “The company had some of the best free cash-flow I have ever seen,” Abbrecht said, “It was earning about $90 million of EBITDA and only paying out a couple million [dollars] in expenditures.”
And it was precisely that strong performance that allowed each of the two private equity firms to recoup about 1.5x their initial investments through recapitalizations prior to this exit, Abbrecht said.
Likewise, National Waterworks’ strong balance sheet saw that TH Lee and JPMP did not have to pursue aggressive growth initiatives for the company. Only a couple small add-ons were made throughout the duo’s ownership period, and they were 100% paid for with the company’s own capital, he added. With regards to personnel, Abbrecht said there were no changes to senior management, though he declined to comment when asked if there were any layoffs.
“This was mostly an organic story,” Abbrecht said. “We spent most of our time filling out the nation with new service branches-mostly in the Southeast and Southwest-where the population is growing and where these products will definitely be needed.”
Additionally, requirements for water infrastructure have been rising rapidly across many U.S. municipalities due to outdated materials and service failures brought about by ruptured pipes and leaks, Abbrecht said.
“In the next 15 years, over 50% of nation’s water infrastructure will be completely outdated,” Home Depot’s DeAngelo said, noting that the market for waterworks supply distribution sees about 7% growth on an annual basis.
“When a pipe breaks and water is rushing down the street, that’s a type of maintenance you can’t defer,” Abbrecht said.