Wednesday, November 29, 2023

Most well-liked Dispute Overhang, Activist, PE Circling

MRC International (MRC) ($920MM market cap) is a worldwide distributor of pipes, valves, fittings (“PVF”) and different upkeep merchandise to fuel utilities, industrials and power finish markets.  The market appreciates the MRO/distributor enterprise mannequin as many pure-play industrial distributors commerce wherever from 10-15x EBITDA, nonetheless MRC International traditionally targeted on the cyclical oil and fuel drillers and has principally traded at a major low cost to different industrial distributors (at present, about 6x EBITDA).  Prior to now decade, because the oil market broke within the mid-2010s, MRC International has targeted on diversifying out to adjoining however much less cyclical markets like fuel utilities, refineries (turnarounds/upkeep can solely be deferred for thus lengthy) and power transition tasks (large beneficiary of the Inflation Discount Act).  However credit score for this combine shift has been laborious to return by in public markets as they proceed to commerce inline with extra upstream targeted NOW Inc (DNOW) (though NOW is debt free).

Traditionally, MRC International has battled being overleveraged, after a pair robust years they’ve lastly gotten that underneath management with debt/EBITDA roughly at 1x (in the event you rely the convertible most popular as fairness).  This previous spring, the corporate began the method to refinance their time period mortgage that comes due in September 2024, nonetheless, a administration described “enterprise disagreement” with their convertible most popular shareholder (who filed a lawsuit making an attempt to dam the refinancing) led them to drag the deal.  The corporate does have ABL capability to redeem the time period mortgage when it comes due subsequent yr, though that would not be a great stability sheet consequence (curiously, due to their liquidity, administration has determined to account for the time period mortgage as long run debt although it matures in lower than a yr).

The convertible most popular is perpetual, pays a at present beneath market charge of 6.5% and has a conversion worth of $17.88 (versus a present worth of $10.88).  The popular holder is Cornell Capital, the namesake Henry Cornell was an unique architect in rolling up distributors to what would change into MRC International whereas he was managing Goldman’s non-public fairness enterprise.  From their amended 13D following the lawsuit, it’s clear that Cornell desires to be cashed out:

The Lawsuit seeks, amongst different issues, (i) a declaration that the Issuer’s contemplated refinancing transaction violates the Issuer’s company constitution and (ii) an order to enjoin the Issuer from signing or executing any definitive documentation with respect to, or in any other case consummating, the Refinancing. Whereas MI objects to the Refinancing as contravening MI’s rights pursuant to the Certificates of Designations, MI has indicated to the Issuer that it needs to barter a decision acceptable to all events. Such a decision may, for instance, contain the Issuer repurchasing the popular inventory held by MI in complete or partially for money or doubtlessly different types of consideration. Nevertheless, there may be no assurance that any such transaction will happen, or the phrases of any such transaction.

With that in thoughts, in seems the activist fund Engine Capital which owns roughly 4% of the shares excellent, of their quarterly letter, they outlined ideas that MRC International may very well be bought for between $14-$18/share.  Now administration is dealing with stress from an upcoming mortgage maturity, a grumpy most popular shareholder and an activist frequent inventory investor.  On Halloween eve, information comes out from Bloomberg Information that MRC International is exploring a sale after receiving curiosity from non-public fairness corporations.  A buyout would include a brand new time period mortgage in place, liquidity for Cornell Capital, appease Engine and doubtlessly obtain an fairness valuation that MRC International will not in public markets.

Once more, the closest peer is DNOW, though they’re much more uncovered to upstream oil and fuel, there is a extensive hole between the place MRC and DNOW commerce and different distributors.  Given the leverage right here by means of the popular shares, a purchaser solely has to present MRC a bit of a number of enlargement credit score for the improved enterprise combine shift for fairness shareholders to do properly.

At 7.5x EBITDA (ahead estimate from, which admittedly is a a number of grabbed barely out of skinny air, you are taking a look at a few $15/share goal worth, a pleasant premium to the present worth.  If a deal would not occur, there’s not a lot, if any, premium actually baked into the worth.  MRC International is dealing with some covid hangover headwinds of their quick rising (and the perfect section) fuel utilities enterprise as their clients are destocking like many others after provide chain points triggered utilities to overorder in 2021-2022.  However that section has grown at a ten+% CAGR for a decade and may return to development shortly.  MRC has been a favourite pitch of these desirous to be lengthy oil and fuel, however in a extra smart manner than proudly owning the producers, if power does rally, MRC ought to profit together with it.  In a manner, it is the right hated small cap worth inventory.

Disclosure: I personal shares of MRC

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