The sands of time
With $150M in operating synergies, Fairmount Santrol has a way to cope with market volatility
Who: Fairmount Santrol
What: Mining company merges with Unimin to form Covia Holdings
Why it matters: Deal looks beyond mere scale to drive more than $1 billion in value creation
The merger of Fairmount Santrol and Unimin Corp. — a deal years in the making — will bring $150 million of annual operational synergies, says Jenniffer Deckard, who has taken the reins of the newly formed Covia Holdings Corp. The company expects those synergies to result in more than $1 billion in value creation.
“Because of the complementary nature of our end markets, our plants, our products and our geographies — this deal is less about redundancies and taking redundant things out of the system and more about the expansion of complementary assets,” says Deckard, who had been president and CEO of Fairmount. “They have many plants and assets in geographies we’re not even near. We have products they don’t have. We can leverage those assets into these markets for what we think will be significant organic growth opportunities.”
Fairmount has been a leading provider of high-performance sand and sand-based products used by oil and gas exploration and production companies to enhance the productivity of their wells. Unimin, a wholly owned subsidiary of Belgium’s SCR-Sibelco NV, is one of the largest producers of quartz proppants for oil and natural gas stimulation and recovery. For the 12 months ended March 31, the two companies combined for $2.5 billion in revenue and had 2018 first-quarter EBITDA of more than $150 million.
This week, Smart Business Dealmakers goes behind the scenes with Deckard to explore the relationship of the two companies, the factors that finally enabled them to merge and the powerful role that external M&A advisers played in facilitating a deal.
The right time to move forward
Fairmount has made numerous acquisitions over the years and the potential of a deal with Unimin was always in the background. But years of M&A experience have given Deckard the wisdom and the patience to take a methodical approach to dealmaking.
“Every time I’m out in the public, analysts and investors are asking about consolidation,” Deckard says. “Some of our peers are out there talking about consolidation. My response over the last four years has been very similar. In this industry, size and scale is important and it matters. But Fairmount would not look at any kind of consolidation move for scale alone. It just wouldn’t fit with how we look at things. We are really focused on what is complementary to our assets, to our strategy and to our focus on education and value-added products.”
As informal talks ensued with potential partners, Deckard kept coming back to Unimin and two key variables: market cycles and capital structure.
“We both have energy segments and we both have industrial segments,” Deckard says. “Unimin brings to the table a much larger industrial business segment. When the energy segment is strong, then Fairmount’s percentage of contribution grows. When the energy market is down – and in some cases goes to zero – we’re contributing almost zero and they’re contributing the lion’s share.”
Fairmount needed to be in a position where it could be a strong contributor to the overall business right from the start in order to responsibly do a deal, Deckard says. Under the terms of the Covia deal, Fairmount shareholders will receive $170 million in cash and will own about 35 percent of the combined company.
“It’s hard for them to give us 35 percent if we’re in a position where we’re contributing 10,” she says. “We kind of had to hit bottom. When does the energy segment hit bottom and start to come back up such that we’re on the upswing for the next couple of years so that we build some cash, pay down some debt and make some investments and be stronger throughout the next energy cycle?”
Valuation was another component of the deal that had to be worked out. It became a big challenge for two companies that tend to be very volatile in terms of performance.
“If you look at the last two years, it looks very different than the last seven years,” Deckard says. “If you look at the last 12 months, it looks very different than the last seven years or the last two years. When you are such a cyclical business, how do you place a valuation on it?
“We really had to listen to very different views on the market dynamics and really understand the details on what each company was bringing to the table,” she adds. “We had to figure out a way to reach agreement on valuation. Not even reach an agreement on valuation. We had to reach an agreement on how you even look at valuation.”
The fact that Fairmount was a public company and Unimin was privately owned by an overseas business only added to the complexity. Both parties spent extensive time, dollars and resources with “very powerful third parties,” Deckard says, to help identify synergies from the ground up.
“We went with thousands and thousands of origin destination pairings,” Deckard says. “We took our 50 plants and our 100 terminals and every single lane on every single product of distribution costs and product costs and looked at what does that look like if you optimize it? We loaded it all in there, simulated a market in various market demand modes and then allocated market share to the two companies and sold it separately. Then we took that same market share, mixed the assets together and sold it together to look at how much cost could we take out of the system just purely through optimization.”
In this case, as Deckard mentioned earlier, it wasn’t about eliminating redundancies. A better analogy is the way Deckard says both companies have always run their businesses.
“We didn’t take anything out, we didn’t divest anything,” Deckard says. “We just said nothing changes on either side, now mix it up. It’s pure optimization. We do that every single day and so do they.”
The effort turned up $150 million in operational synergies and a lot of confidence going forward.
“We’ll also look at procurement synergies,” Deckard says. “So as a larger company that has a broader reach and footprint, we should be able to get some economies of scale and bring some of our procurement and purchasing together to create opportunities for quantity purchases and things like that.”
M&A expertise is critical
The benefits of this deal are scale in operations, logistics and the breadth of Covia’s new product portfolio, which Deckard expects to drive revenue and other financial capabilities.
“It’s a more balanced mix between energy and industrial business segments,” Deckard says. “Energy is quite volatile and the industrial side being much more stable. That will provide a stronger and more stable financial profile, both in earnings, cash flow generation throughout economic cycles and a stronger balance sheet relative to Fairmount before. But overall, not only better balance, but bigger upside opportunities in the strong portions of the energy cycle to really generate cash.”
Deckard says she and her team couldn’t have done it without the help of advisers – such as Jones Day and Wells Fargo Securities on the Fairmount side – that have extensive M&A experience.
“We do a lot of acquisitions, but not something of this scale,” Deckard says. “A true merger and change of control of this scale brings nuances and risks that we haven’t encountered before. But good advisers have lived through and learned from past experiences. That was very valuable to us. They helped us estimate and think about risks and nuances that I would never have encountered before or even had thought about. They just helped us to not misstep and to avoid some landmines along the way, or at least make us aware of some that we would probably be facing.”
How to reach: Covia Holdings Corp., www.coviacorp.com