It almost goes without saying that timing is a critical element for success in initial public offerings. With the construction business on an upswing, now could very well be the right moment for the IPO of a construction materials conglomerate. Enter Summit Materials, which will make its market debut later this week on the New York Stock Exchange. Here's a look at the particulars of the firm, and its IPO.
High building costs
Summit Materials is basically a collection of building materials assets. Founded in 2009, the company grew through acquisitions, and now has 11 firms in its portfolio. Collectively, these firms supply products such as aggregates (coarse materials such as sand and crushed stone used as ingredients in concrete or mortar), ready-mixed concrete, cement, and asphalt paving, among others.
The company is active in 17 states, and a slight majority (56%) of its revenue is derived from private construction products, with public works making up the remainder.
Growth has been rapid. The firm's revenue has sprouted from $405 million in 2010 to nearly three times as much ($1.2 billion) last year. It has yet to make a profit, however, although 2014's shortfall of just over $6 million was a big improvement over the $103 million it lost in 2013.
That sort of top line growth doesn't come easy or cheap. The 11 component firms of Summit Materials were molded from a dizzying 34 acquisitions made by the company over its relatively brief existence. These buys have really added to the firm's bills, to the point where its total debt stood at over $1 billion at the end of last year.
Into the black
After the IPO, Summit Materials won't exactly be the master of its own destiny. It was originally brought to life with the financial backing of two institutional investors, big investment firm The Blackstone Group (NYSE:BX), and private equity concern Silverhawk Capital Partners.
Blackstone will still have plenty of skin in Summit's game. It will hold a strong majority of the company (72% to nearly 75%, depending on whether and by how much the issue's underwriters exercise their share allotments). So its immediate future will be strongly tied to that firm's interests.
Blackstone tends to holds its investments until it can exit out of them at a profit, so we should expect the company to start selling off its stakes when it's advantageous to do so -- perhaps when it begins consistently turning a profit.
It might not wait very long. According to Summit's IPO registration statement, citing data from the National Association of Home Builders, housing starts are expected to grow by a robust 57% in the 2013 to 2016 period. Meanwhile, nonresidential private construction is anticipated to rise by 26% over the same stretch of time.
Although public infrastructure spending is only projected to advance by 3% in that three-year span, the company believes that since these works are aging, they will provide good potential for its business in the long term.
Reaching a Summit
If those growth projections are realistic, Summit Materials will be well poised to take advantage. The company believes it's one of the 10 largest aggregates suppliers on the market, and in the top 25 of cement producers. That kind of prominence, combined with the firm's presence in numerous major markets, should help win it lucrative projects.
The debt level is a bit worrying, though. The company intends to use some of the anticipated $376 million or so in net IPO proceeds to reduce the pile, but there will be plenty left to pay off. Those interested in a potential investment in the company should track its progress in doing so over the coming quarters.
Summit Materials' IPO is scheduled to take place on Thursday. The stock will trade on the NYSE under the ticker symbol SUM. Just over 22 million shares will be sold at a price of $17 to $19 per share, and the issue's lead underwriting syndicate includes Citigroup, Bank of America Merrill Lynch, and Goldman Sachs.
Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Goldman Sachs, and owns shares of Bank of America, Citigroup, and The Blackstone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.