Banc of America Securities and Morgan Stanley are providing an all-bank debt financing to back Walter Industries $1.9 billion acquisition of Mueller Water Products from DLJ Merchant Banking. "We made a strategic decision to initially finance the acquisition of Mueller with medium-term flexible bank debt capital rather than equity," said Don DeFosset, chairman and ceo of Walter, on a conference call discussing the transaction. "While this would temporarily increase our leverage position, our expected strong cash flows will be used to rapidly reduce debt."
The financing will include more than $1 billion in term loan "B" debt. "We've been told by our advisors that $1 billion is large, but doable," said Miles Dearden, treasurer of Walter, who added that not only is this low-cost financing, it's also prepayable. DeFosset said ultimately Walter may raise more permanent capital such as bonds or other long-term securities, but this strategy "does not dilute existing shareholders at a time when we believe significant value creation lies ahead."
The two leads, which also led a convertible offering for Walter in April 2004, advised the company on the purchase, collecting north of $40 million in financing and advisory fees. The deal also provides a major windfall to DLJ, which purchased Mueller back in 1999 from Tyco International for $938 million. According to one hedge fund manager, DLJ tried to sell Mueller Water two years ago, but bids did not come in above 7 times EBITDA. Instead, the private equity shop turned to a dividend recapitalization that provided a $396 million dividend. This was completed last year and left approximately $1.05 billion of debt, including first and second-lien tranches that are being refinanced as part of this deal.
The $1.9 billion purchase price comprises $860 million in cash and the debt held by Mueller Water. The company will be split into two units. "Very uniquely we have set up a capital structure that has two distinct legal entities from a debt-holding standpoint," said DeFosset. On one side will be the Water group, which combines Walter's pipe business with Mueller and will be a separate legal entity. On the other side will be the remaining Walter businesses, which includes homebuilding and financing and its energy businesses that will also have separate standalone debt.
The Water Group will have a $1 billion "B" loan and a $125 million revolver and will be levered up about four times through the bank debt and 5.2 times including subordinated debt. The other side of the Walter Industries business will have a $325 million "B" loan and a $200 million revolver. Walter currently has a $265 million revolver due 2008 that will be refinanced.
With this dual structure, whereby Mueller already has the infrastructure to report as a separate standalone entity, it will make it easier to potentially spin off the business in the future.
