Positions Granite as a National Leader Across Both Transportation and Water Infrastructure Markets
Transaction Equity Value of $376 Million
Expected to Generate Annual Cost Synergies of Approximately $20 Million
Enterprise Value Multiple of 8.2x 2018 Expected EBITDA1, Including Full Run-Rate of Cost Synergies
Expected to be Accretive to Granite’s Adjusted EPS and High Single-Digit Accretive to Granite’s Adjusted Cash EPS in First Year After Close2
Granite to Host Conference Call and Webcast at 5:30 a.m. PT / 8:30 a.m. ET Today
WATSONVILLE, Calif. & THE WOODLANDS, Texas – Granite Construction Incorporated (NYSE: GVA) and Layne Christensen Company (NASDAQ: LAYN) announced today that they have entered into a definitive agreement whereby Granite will acquire all of the outstanding shares of Layne in a stock-for-stock transaction valued at $565 million, including the assumption of net debt. The transaction, which was unanimously approved by the Boards of Directors of both companies, is expected to close in the second quarter of 2018.
Under the terms of the agreement, Layne shareholders will receive a fixed exchange ratio of 0.270 Granite shares for each share of Layne common stock they own. This represents $17.00 per Layne share, or a premium of 33%, based on the volume-weighted average prices for Granite and Layne shares over the past 90 trading days. Following the close of the transaction, Layne shareholders will own approximately 12% of Granite shares on a fully diluted basis, and Granite’s Board will be expanded to include one additional director from Layne. The transaction represents an enterprise value multiple of 8.2x 2018 expected EBITDA1.
As a leading water management, construction, and drilling company with the #1 position in well drilling and a #2 position in cured-in-place pipe (CIPP) rehabilitation, Layne significantly enhances Granite’s presence in the large and growing water infrastructure market. The combined company, including Granite’s existing water business, will have water-related revenues of approximately $600 million3, positioning Granite as a national leader across both the transportation and water infrastructure markets. Together, Granite and Layne will have nearly 7,000 employees and serve a diverse and growing customer base.
“This strategic transaction brings together two complementary organizations to create a platform for growth, delivering significant benefits for shareholders, employees, and customers,” said James H. Roberts, President and Chief Executive Officer of Granite. “With Layne’s expertise and leading water positions, Granite will advance its goal of becoming a full suite provider of construction and rehabilitation services for the water and wastewater market. With enhanced scale and capabilities, Granite will be better positioned to address the growing water and wastewater needs throughout the infrastructure lifecycle. We expect this transaction will create value for shareholders in both the near- and long-term, including earnings accretion on an adjusted basis and synergy realization. As a stronger player in the attractive water and wastewater sector, we will have significant opportunities to capture a larger share of the market and accelerate our growth prospects.”
“We are pleased to reach this agreement with Granite, which creates significant value for all Layne stakeholders,” said Michael J. Caliel, President and Chief Executive Officer of Layne. “Our organization believes that Granite is the right partner. This is a terrific opportunity as our shareholders will receive a significant premium and share in the upside potential in a diversified and growing company with greater scale and resources. Our customers will benefit from our shared commitment to operational excellence, quality, and customer service, and our employees will benefit from the upside and strong growth prospects of being part of a larger infrastructure company. Our leadership position in water resources combined with our increasing presence in the growing water midstream business should be greatly enhanced by our combination with Granite. The Layne team looks forward to working together with Granite to implement a seamless transition.”
Mr. Roberts concluded, “Together, Granite and Layne will provide expanded career opportunities as a larger, stronger, and more diversified company. Granite will also benefit from gaining the expertise and specialized skills of Layne employees as we expand our presence in water infrastructure. Importantly, we believe this combination unites two similar cultures that emphasize core values focused on ethics, safety, sustainability, and a commitment to the communities in which we work and live. We look forward to welcoming Layne’s talented employees to Granite. Together, we can capitalize on attractive and growing market opportunities, given the expected increase in demand for large water infrastructure programs.”
Creates a Platform for Growth
- Establishes Granite’s Leadership Position in the Water Infrastructure Market. Layne is a leading water management, infrastructure services, and drilling company with a broad portfolio and a diverse and growing customer base across municipal, industrial, agriculture, and energy end markets, with water-related services accounting for over 80% of revenues4. Together with Layne, Granite will be a leader in water infrastructure and wastewater rehabilitation, well positioned to take advantage of the attractive macro dynamics of the water services industry. The U.S. municipal utility sector is forecasted to spend $532 billion in capital expenditures through 2025, with over 50% of the spending expected to be related to water and wastewater distribution networks.5 A combination with Layne represents the next logical step in the evolution of Granite’s strategy to diversify its service offerings by expanding in the water and wastewater market. Since acquiring Kenny Construction Company in December 2012, which gave Granite an entrance into the water markets, Granite has made a number of investments in the water sector to strengthen its capabilities, expand its footprint, and grow its presence. Now, with the addition of Layne’s leading portfolio of services, Granite will be better positioned in water infrastructure and wastewater rehabilitation.
- Provides a Broad Portfolio of Services to the Water Sector. Together with Layne, Granite will enhance its capabilities and service offerings to provide a full lifecycle portfolio to better meet the needs of its public and private water sector customers.
- Creates a National Footprint with Capabilities Across Water and Transportation Markets. Granite is a leader in the transportation market with a significant presence across the U.S. and backlog of over $3.7 billion. Together with Layne, Granite will offer a broader suite of services in more markets across the country, with greater reach, particularly in the Midwest.
- Adds Significant Base of Stable, Recurring Revenue. With a greater presence in the growing water and wastewater end markets, Granite will benefit from more stable and diverse funding sources. Specifically, Granite will benefit from Layne’s consistent, recurring revenue stream in maintenance, repair, and Inliner product sales. On a pro forma basis, Layne’s revenue would represent 14%6 of the combined company, which is anticipated to increase as Granite capitalizes on additional meaningful revenue opportunities.
Delivers Substantial Financial Benefits
- Drives Significant Cost Savings. Granite expects to achieve approximately $20 million of annual run-rate cost savings by the third year following the close of the transaction, with approximately one-third realized in 2018. Granite expects to incur approximately $11 million in one-time costs to achieve these savings.
- Accretive to Granite’s Earnings. The transaction is expected to be accretive to Granite’s adjusted earnings per share, and high single-digit accretive to Granite’s adjusted cash earnings per share in the first year after closing7.
- Maintains Granite’s Financial Strength and Flexibility. The combined company will have a strong balance sheet and liquidity profile. Following the close of the transaction, Granite will maintain an investment grade credit profile with debt-to-EBITDA of less than 1.5x8. The expected strong cash flow generation of the combined business will enable Granite to return to current leverage levels by the end of 2018.
Financing, Approvals, and Close
Granite expects to assume outstanding Layne convertible debt with principal value of $170 million and honor the terms and existing maturity date provisions of the indentures. The transaction is not expected to trigger any change of control provisions under Layne’s indentures. Granite also expects to fund the cash financing requirements of the transaction of approximately $70 million through a combination of existing cash on hand and availability under Granite’s revolving credit facility. Following close, Granite will maintain an investment grade credit profile and significant financial flexibility.
The transaction, which is expected to close in the second quarter of 2018, is subject to the satisfaction of customary closing conditions, including applicable regulatory approvals and the approval of the shareholders of Layne. Wynnefield Capital, which has an approximate 9% voting interest in Layne, has agreed to vote in favor of the transaction. In connection with the transaction, Granite will issue approximately 5.4 million shares9 of Granite common stock to Layne common stockholders.
Perella Weinberg Partners LP is serving as financial advisor to Granite, and Jones Day is serving as legal counsel. Greentech Capital Advisors, LLC is serving as financial advisor to Layne, and Latham & Watkins LLP and Stinson Leonard Street LLP are serving as legal counsel.
Conference Call and Webcast
Granite will conduct a conference call today, Wednesday, February 14, 2018, at 5:30 a.m. Pacific Time/8:30 a.m. Eastern Time to discuss this announcement. Access to a live audio webcast and slide presentation will be available on its Investor Relations website, investor.graniteconstruction.com. An archive of the webcast will be available on the website approximately one hour after the call.
Through its offices and subsidiaries nationwide, Granite (NYSE:GVA) is one of the nation’s largest infrastructure contractors and construction materials producers. Granite specializes in complex infrastructure projects, including transportation, industrial and federal contracting, and is a proven leader in alternative procurement project delivery. Granite is an award-winning firm in safety, quality and environmental stewardship, and has been honored as one of the World’s Most Ethical Companies by Ethisphere Institute for nine consecutive years. Granite is listed on the New York Stock Exchange and is part of the S&P MidCap 400 Index, the MSCI KLD 400 Social Index and the Russell 2000 Index. For more information, visit graniteconstruction.com.
Layne is a global water management, infrastructure services and drilling company, providing responsible solutions to the world of essential natural resources — water, minerals and energy. We offer innovative, sustainable products and services with an enduring commitment to safety, excellence, and integrity.
1 Based on Granite’s expectations for Layne financial performance during calendar year 2018, and including full run-rate cost synergies and expected present value tax benefit of Layne net operating losses.
2 Adjusted EPS excludes non-recurring transaction and integration costs and Adjusted Cash EPS further excludes amortization of intangible assets.
3 Based upon Layne’s approximate LTM water revenue as of Layne’s fiscal Q3 2018 (October 31, 2017) and Granite’s three-year water-related average revenue.
4 LTM figures as of Layne’s fiscal Q3 2018 (October 31, 2017) and pro forma for the divestiture of the Heavy Civil business segment; Layne’s fiscal year end is January 31.
5 U.S. Municipal Water Infrastructure: Utility Strategies & CAPEX Forecasts, 2016 – 2025, Bluefield Research.
6 LTM figures as of Layne’s fiscal Q3 2018 (October 31, 2017) and pro forma for the divestiture of the Heavy Civil business segment; Layne’s fiscal year end is January 31. LTM figures as of Granite’s fiscal Q3 2017 (September 30, 2017); Granite’s fiscal year end is December 31.
7 Adjusted EPS excludes non-recurring transaction and integration costs and Adjusted Cash EPS further excludes amortization of intangible assets.
8 Assumes conversion of Layne 8.00% notes post-closing.
9 Outstanding Layne Equity awards to be cash settled at closing.