Morgenthaler Partners, last month, closed a recapitalization of rePipe Inc., obtaining a majority stake in the underground construction provider. The firm recapitalized the business with Parthenon Capital, which first invested in rePipe in 2000, and remains a significant investor following the deal.
Terms of the transaction were not disclosed, although Morgenthaler indicated it did fit within the firm’s typical enterprise value range of $50 million to $250 million. To finance the deal, the firm tapped Wells Fargo Foothill to provide a line of working capital, while Regiment Capital supplied a term debt loan. Morgenthaler used its $850 million, 2001-vintage Morgenthaler Partners L.P. VII fund for the deal, and through the transaction, Morgenthaler and Parthenon together hold a majority stake.
Houston-based rePipe focuses on underground construction and pipe rehabilitation project needs, and provides design assistance, pipe bursting and the manufacturing of trenchless lining technologies. The company, with additional operations in Florida, Arkansas and California, employs more than 500 people and posted revenue of $125 million in 2003.
While it sounds confusing, the company essentially repairs underground sewers and pipes without creating a cavity on the surface. This contrasts with the open-cut method of repair that digs a trench to get at the underground pipes. “The appeal of this technique is that it’s gaining market share,” said Peter Taft, a general partner with Morgenthaler. “It doesn’t cause a disruption to the neighborhood, and the technique is anywhere from 50% to 75% cheaper than using the open cut methods.”
Taft went on to say, “The company needed to bulk up its capital structure. We pursued a recap so the company can continue on its growth program, and the investment will provide additional capital to the company. In this industry you need bonds and those markets have tightened considerably.”
RePipe is the No. 2 player in the industry, behind the publicly held Insituform. After rePipe, though, the industry is fairly fragmented, according to Taft, which should make for an attractive consolidation opportunity. “The company has already identified 10 markets it plans to address, which start in the Northwest, move down the coast and on to the Southeast,” Morgenthaler Principal Simon Feiglin said. RePipe will look to expand by starting operations from scratch in select regions, as well pursuing any attractive add-on deals that arise.
Another appeal for Morgenthaler is the industry fundamentals, which show a growing need for rePipe’s services. Feiglin said, “The market is poised for significant future growth. The aging water and waste-water infrastructure of most cities in the U.S. is at a critical problem, and this needs to be addressed.”
The Environmental Protection Agency has estimated that over the next 20 years, municipalities will have to spend around $350 billion to tackle the problem. Currently the market for trenchless rehabilitation projects stands at about $2.8 billion.
Looking ahead, the public market could represent an attractive exit for rePipe. The management team, led by Chief Executive Tim Tarrillion. He previously headed the Nasdaq-listed Enclean Inc., which was sold to Waste Management in 1993. Additionally, Taft noted, “A public offering could be a possibility…There’s already analyst coverage on the industry, and if the company continues to execute, two to three years down the road, there could be potential for an IPO.”