TRG | The Bottom Line – 10/25

The week started and ended with big heavy materials M&A in the news. The week started out with Construction Partners (ROAD) announcing the acquisition of Austin, TX-based Lone Star Paving (LSP), expanding ROAD’s footprint into Texas and a continuation of the company’s growth strategy into the Southeast market. The deal proposal is a combination of cash ($654MM) and stock (3MM shares), implying a mid-7x EBITDA multiple. This also marks the 7th state for ROAD to operate. Importantly, the Lone Star acquisition accelerates ROAD’s previously outlined 2027 margin bogie of 14-1.6%, a full two years ahead of schedule. Lone Star boasts a healthy 20%+ EBITDA margin, supported by three important factors: 1) solid market share in the central TX market; 2) driving value through vertical integration (aggregates and liquid AC terminals), 3) scale of enterprise allowing fixed cost leverage (which is a powerful lever). The market clearly approved of the deal, ROAD stock trading up 12% intraday vs. a flat to slightly down S&P 500. The deal is expected to close by the end of calendar 2024. The week ended with what was a rumor and then confirmed by Summit Materials (SUM) that the company received an acquisition bid by privately-held Quikrete. It was only a year ago that SUM had received a takeover offer, rumored to be from Heidelberg, but took a different strategic path by combining with Argos ($3.2B cash and stock transaction), a deal that closed 1/12/24. Barely a year after the announced deal to combine with Argos, SUM has received yet another bid to be acquired, this time from an unlikely suitor. As a reminder, SUM had declined an offer of 10-11x EBITDA last year, which poses the question “What does SUM think the company is worth?” As of the publication of our “Q3’24 Heavy Materials & Infrastructure Survey” (published 10/3/24), we estimated SUM’s 12-month fair value range to be $52-$59, the mid-point being $55. The mid-point of this range is based off of a ~10.5x EV/EBITDA multiple on our FY’26 EBITDA of $1.2B discounted back. Given SUM’s past response to an acquisition offer, recent industry multiples, and TRG’s research we would expect the offer to be above an 11x multiple and into the $50s.