Southland Holdings, Inc. Transaction Summary
Business context and reporting period
On May 25, 2022, Legato Merger Corp. II, Legato Merger Sub Inc., and Southland Holdings LLC entered into a definitive merger agreement. The transaction would combine Southland with Legato Merger Sub, with Southland surviving as a wholly owned subsidiary of Legato. The filing is a transaction-focused Form 8-K and does not provide a conventional quarterly or annual financial update for Southland.
Southland, based in Grapevine, Texas, is described as one of the largest construction companies in North America. Its subsidiaries include Johnson Bros. Corporation, American Bridge Company, Oscar Renda Contracting, Southland Contracting, Mole Constructors, and Heritage Materials. Its markets include transportation, tunneling, heavy civil, bridges and structures, water treatment and conveyance, alternate delivery, and engineering.
Transaction economics and key financial metrics
- Base merger consideration: $343 million of Legato common stock, calculated at $10.15 per share.
- Cash consideration: $50 million, subject to available funds and permitted substitution of up to $50 million of Southland cash distributed before or at closing. Any such distribution reduces the cash payable at closing.
- Potential earnout: up to $105 million of additional Legato common stock, or up to 10,344,828 shares, based on Adjusted EBITDA targets for 2022 and 2023.
- 2022 earnout targets: 3,448,276 shares at Adjusted EBITDA of at least $125 million, increasing to 5,172,414 shares at at least $145 million.
- 2023 earnout targets: 3,448,276 shares at Adjusted EBITDA of at least $145 million, increasing to 5,172,414 shares at at least $165 million.
- Adjusted EBITDA is a non-GAAP measure defined in the merger agreement and includes pro forma treatment of the merger for 2022, with specified exclusions and adjustments.
- The filing text does not provide clear values for Southland revenue, GAAP net income, operating cash flow, margins, total debt, or liquidity.
Material changes versus the prior comparable period
The filing does not present comparable-period operating results, financial statements, or year-over-year changes. The material development is the execution of the merger agreement and the proposed transition of Southland into a publicly traded combined company.
Guidance, outlook, risks, contingencies, and unusual items
- Closing was expected in the second half of 2022, subject to stockholder and company-member approvals and other closing conditions.
- Required conditions include an effective Form S-4 registration statement, applicable regulatory approvals and HSR clearance, Nasdaq listing approval, delivery of audited Southland financial statements for 2019 through 2021, and Legato having at least $5,000,001 of net tangible assets after redemptions.
- The agreement could be terminated if closing has not occurred by March 31, 2023, if required approvals are not obtained, if legal or regulatory obstacles prevent completion, if the net tangible asset condition is not met, or following certain uncured breaches.
- Southland members agreed to lock up the base merger shares for six months after closing, subject to exceptions; the lock-up does not cover earnout shares.
- Following closing, the board was expected to have seven members, five initially designated by Southland and two by Legato. Legato would also have one board observer.
- Management identified risks including failure to complete the transaction, stockholder redemptions, regulatory and listing requirements, integration and growth execution, competition, customer and supplier relationships, retention of key personnel, litigation, transaction costs, economic conditions, COVID-19 effects, and changes in assumptions underlying projected profitability.
- The filing states that some financial information in the filing and exhibits is non-GAAP and may be adjusted in the later registration statement.
Important facts for investors to verify
- Whether the merger closed, and the final closing date and terms.
- The audited 2019–2021 Southland financial statements and subsequent operating results, including revenue, profitability, cash flow, debt, backlog, and liquidity.
- The final number of Legato shares issued, the amount of cash paid, redemption levels, and resulting ownership dilution.
- Whether the 2022 and 2023 Adjusted EBITDA earnout targets were achieved and the final shares issued.
- Completion of SEC registration, stockholder and company-member approvals, HSR or other regulatory clearances, and Nasdaq listing requirements.
- The definitive proxy statement/prospectus and its disclosures regarding projections, non-GAAP reconciliations, material contracts, litigation, contingencies, and transaction-related fees.