There's been a lot of talk this week about infrastructure with the unveiling of the Trump administration's $200 billion infrastructure plan. It's also renewed interest in infrastructure stocks, some of which have seen their share prices rise recently.
Now comes a good-sized merger in the infrastructure industry: Granite Construction's purchase of Layne Christensen announced Wednesday for $565 million, including debt. The stock-for-stock deal works out to $17 per share, a 33% premium for Layne shareholders who will end up with 12% of the combined company.
Why did Granite go after Layne? Quite simply, to expand in the water infrastructure business.
The Woodlands, Texas-based target is a water management and construction company with the number-one position in well drilling and the number-two position in cured-in-place pipe rehabilitation. Layne does a lot of work for the oil and gas industry as companies need water and water processing services for their fracking operations, which have come back strong given higher oil prices.
Just last week, Layne announced it had completed a six-mile extension of its Hermosa pipeline, which expands its midstream business further north into Reeves County, Texas, where access to water is more limited for oil and gas producers.
"We expect to see continuing demand growth for water in the energy sector, especially in the Delaware Basin, due to attractive producer economics, longer horizontal drilling lengths and more use of water per foot of lateral length," CFO and Layne Water Midstream president J. Michael Anderson said at the time.
Layne also has exclusive water rights on 88,000 acres owned by the State of Texas General Land Office in Reeves and Culberson counties to develop non-potable water resources for use in oil and gas drilling and completion activities. The company is currently developing water resources on the lands and working on commercial arrangements with oil and gas producers in the area. "This is kind of a gold mine in the making," Anderson told the Houston Chronicle.
Granite Construction – which is based in Watsonville, Calif. – said the combination will result in a company with water-related business that generate around $600 million per year in sales.
"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," Granite CEO and president James H. Roberts said in a statement.
Jefferies analyst Martin Englert said the acquisition will provide Layne with a more solid balance sheet and liquidity profile that was often an investor concern while giving Granite a complementary water business with little overlap (Granite's business includes waterway locks, dams, pipelines, canals and other water-related facilities).
Englert added that the combination will have a high exposure to public works projects with Granite at 75% and Layne at nearly 50%, "positioning the company well for U.S. infrastructure spend [spending]."
Granite expects the deal to result in $20 million per year in cost savings starting the third year after it closes, although it will have to incur $11 million in one-time costs to achieve those savings. It also anticipates that the transaction will boost cash earnings per share by a high single-digit in the first year after closing, which is expected in the second quarter of this year.
Wynnefield Capital, a New York hedge fund and value investor that has a 9% voting interest in Layne, has agreed to vote in favor of the transaction.
Walter Todd, chief investment officer at Greenwood Capital, which has invested in infrastructure stocks such as Granite, thinks the deal could lead to others in the industry.
"This space remains very fragmented and could be a good candidate for continued M&A as companies try to increase scale and take advantage of increased infrastructure spending," he said. Certainly a space to watch.
