Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 3, 2009
Event: Entry into a Material Definitive Agreement to acquire Precision Pipeline LLC and Precision Transport Company, LLC (collectively "Precision").
MasTec, a Florida corporation specializing in energy infrastructure, entered into an agreement to purchase Precision, a leading natural gas, crude oil, and refined products transmission pipeline infrastructure contractor based in Eau Claire, Wisconsin. The transaction aims to expand MasTec's capabilities to provide end-to-end construction services from "wellhead to burner tip."
Key Financial Metrics and Transaction Terms
Purchase Price Structure:
- Cash Consideration: $150 million (subject to adjustment).
- Escrow: $15 million of the cash consideration held for 18 months for indemnification obligations.
- Earn-Out: Five-year earn-out equal to 40% of Precision's EBITDA for the last two months of 2009 and 30% of annualized EBITDA in excess of $35 million for the remainder of the period. Payable in cash or MasTec common stock at MasTec's option.
- Debt Assumption: MasTec will assume indebtedness up to $20 million, contingent on Precision having property, plant, and equipment with a net book value exceeding $44 million. Additional indebtedness reduces the cash consideration dollar-for-dollar.
Financing Condition: Closing is conditioned on MasTec obtaining financing providing net proceeds of not less than $75 million.
Precision Historical and Estimated Financials (in millions):
| Metric | 2007 (Actual) | 2008 (Actual) | 2009 (Est. Full Year) |
|---|---|---|---|
| Revenue | $303 | $507 | <$300 |
| EBITDA | $37 | $93 | ~$60 |
Backlog: As of September 30, 2009, Precision had over $500 million in backlog.
Material Changes and Strategic Rationale
The acquisition represents a strategic shift to diversify MasTec's business mix and reduce customer concentration risk. Precision's revenue grew from $50 million in 2006 to over $500 million in 2008. The transaction allows MasTec to:
- Strengthen technical expertise in the energy pipeline construction market.
- Complete its footprint in natural gas, crude oil, and refined products transportation.
- Provide cross-selling opportunities across multiple energy markets.
- Add depth to the management team with Precision's senior leadership.
Working Capital Adjustment: Net working capital will be adjusted to $9 million; any shortfall will be paid by sellers, and any excess will be paid by MasTec.
Guidance, Outlook, and Risks
Outlook: Management anticipates continued growth in the pipeline construction market driven by U.S. energy policy goals, new drilling technologies, and over 5,000 miles of pending major pipeline projects filed with the Federal Energy Regulatory Commission as of October 15, 2009.
Key Risks and Contingencies:
- Financing Risk: No assurance that MasTec will obtain the required $75 million financing; the deal may not close.
- Customer Concentration: Precision derived 91.2% of its 2008 revenue and 77.8% of its YTD 2009 revenue from its top two customers.
- Contract Cancellation: Contracts are terminable at the client's discretion; backlog is an uncertain indicator of future earnings.
- Fixed Price Contracts: Exposure to cost overruns and reduced profitability if actual costs exceed estimates.
- Labor Relations: Substantially all employees are unionized; potential for strikes or unfavorable contract renewals.
- Integration: Risks associated with integrating sales, finance, and IT systems and retaining key management (Murphy and Rooney).
- Environmental and Safety: Exposure to hazardous materials, site contamination, and occupational safety liabilities.
Investor Verification Checklist
- Confirm MasTec's ability to secure the $75 million financing required to close the transaction by December 16, 2009.
- Verify the stability of Precision's top two customers, which accounted for the vast majority of recent revenue.
- Review the full text of the Purchase Agreement (Exhibit 10.1) for specific indemnification terms and earn-out definitions.
- Monitor the realization of Precision's $500 million backlog, noting that contracts are subject to cancellation and delays.
- Assess the impact of potential labor disputes given Precision's unionized workforce.
- Track future pro forma financial statements to understand the impact of amortization and financing costs on MasTec's earnings.