Aegion Corporation (AEGN) does not only trade at 9x-11x CFO, which appears to be an undervalued valuation. The company also received two offers regarding acquiring the company at $26-$28.5. With this in mind, AEGN appears to be offering upside potential and a limited downside protection. Notice that the conditions registered in the initial merger agreement are very standard. The buyer received commitment letters from several banks.
AEGN’s Business Model
Aegion Corporation offers technologies to maintain and rehabilitate infrastructure globally. The company runs two business segments: Infrastructure Solutions, and Corrosion Protection. The most relevant business segment is infrastructure solutions with a contract backlog of $291 million. The corrosion protection segment has a contract backlog of $121 million. Notice that the company discontinued certain operations in 2020:
In my view, the company is valued not only because of its contracts, but also because of its intangible assets and goodwill. AEGN invests a significant amount of money in research and developments, and resorts to a total of 71 patents in the United States and 115 patents outside the United States. In my opinion, most value investors may not include the value of these patents into their financial models:
During the years ended December 31, 2020, 2019 and 2018, we spent $4.9 million, $6.4 million and $5.6 million, respectively, on research and development related activities, including engineering. Source: 10-k
The company’s operations are located all over the world. However, more than 70% of the total number of employees work in the United States. In my opinion, if there is a merger, the management may not have to deal with many jurisdictions. In my experience, a merger in different jurisdictions is usually more difficult to close than a business combination in the United States:
As of December 31, 2020, we had approximately 4,138 employees worldwide (1,574 of which were associated with discontinued operations). Of those employees, 3,127 were located in the United States, 377 in Canada, 257 in the Middle East, 196 in the Asia-Pacific region, 162 in Europe and 19 in South America. Source: 10-k
AEGN Reports A Significant Amount Of Current Assets
As of December 31, 2020, the total amount of assets was equal to $901 million, with total liabilities of $493 million. Cash in hand was equal to $94 million, and more than 50% of the total amount of assets are current assets. I appreciate that the company has a significant amount of current assets with cash. I believe that potential buyers will most likely appreciate it too.
Aegion Corp. reports a significant amount of goodwill, which is equal to $210 million. In my view, investors may believe that there exists significant impairment risk. Yes, it is a risk that investors need to take into account. If the goodwill has to be reduced, the amount of assets would decline. As a result, I believe that the company would be worth a bit less than when the financial accounts were generated. The list of assets is shown in the image below:
AEGN’s total debt is not significant, which I appreciate quite a bit. According to the most recent annual report, AEGN has $219 million in long-term debt. With cash of $94 million, the net debt is equal to $125 million. The company’s Net Debt/2020 CFO ratio is 1.3x, so I don’t believe that the company presents a large amount of debt. I don’t think that the company’s EV/CFO will be affected by AEGN’s financial debt.
That’s not all. I believe that value investors will appreciate that the company was able to reduce its long term debt from $344 million in 2017 to $219 million in 2020. The company appears to be generating liquidity to reduce its long-term debt:
AEGN Reports Stable, And Positive CFO
Last year, AEGN’s gross profit ratio was equal to 24% with sales of $807.764 million. The company’s EBITDA margin is 9%. However, in my opinion, the most interesting is AEGN’s cash flow from operations. In 2020 and 2019, the company’s CFO was equal to $92 million and $59 million respectively. If AEGN is acquired at $0.9-$1 billion, the company’s valuation would be equal to 0.9x-1x 2020 CFO, which I believe is quite cheap. The company’s most recent cash flow is given in the image below:
The Company Received The Offer Of $27 As Well As $28.50
In February, AEGN agreed to be acquired for $963 million, or $26.00 per common share. The Company’s board of directors accepted to recommend the acquisition agreement. The buyer is New Mountain Capital, a private equity firm with more than $30 billion under management. I don’t like deals in which financial advisors are involved because they don’t generally offer cost synergies. With that, I like the company because it is currently at a low valuation. In my opinion, a bidding war could be very profitable for shareholders.
We don’t know the name of the other party. The market only knows that the other buyer proposed $28.50 per share for the company. It is a non-binding proposal subject to due diligence. I would expect New Mountain Capital to offer more than $28.50 in the near future. Take into account that we are talking about a company that is currently trading at 9x-11x CFO.
Under the terms of the Third-Party Proposal, the Third Party would acquire all outstanding shares of Aegion common stock for $28.50 per share in cash. The Third-Party Proposal, at this point, is non-binding and subject to diligence to be conducted, among other things. As a result of the Board’s determination, the Company plans to enter into a confidentiality agreement and engage in diligence activities and discussions with the Third Party. Source: Press Release
Competitors Trade At 11x-28x CFO
Competitors trade at more than 11x CFO, making me think that the buyer could pay more than $28.5 for the company. The following are some of AEGN’s competitors:
Structural Technologies, QuakeWrap, USI Industrial Services, Aslan FRP, Sika, WachsWater Services, LiquiForce, Clock Spring, ShawCor, HJ3. Source: Owler
Among the competitors listed, Sika trades at 28.3x CFO, and Shawcor trades at 11.19x. With this in mind, I believe that both buyers may pay much more than $0.9-$1 billion for the company. At 15x CFO and using 2020 CFO of $92 million, the total valuation would be equal to $1.3 billion. In the best case scenario, I would expect a total valuation of 20x CFO or $1.8 billion. To sum up, in my opinion, the total valuation could increase by more than 25% if there is a bidding war.
The Termination Fees Are Not Significant
I like the fact that the termination fees are not large. If the merger is terminated, New Mountain Capital may have to receive $40 million from AEGN. It represents less than 4% of the total merger contribution. I don’t think that the other party will decide not to buy AEGN because of the termination fees:
The Amendment also increases, from $30 million to $40 million, the termination fee the Company will be required to pay to Parent if the Merger Agreement is terminated (i) by Parent or the Company due to the Merger not occurring by August 16, 2021 (the “Outside Date”) or by Parent due to the Company’s material breach of the Merger Agreement. Source: 8-k
The Amendment also increases, from $60 million to $70 million, the termination fee Parent will be required to pay to the Company if the Merger Agreement is terminated by the Company. Source: 8-k
The Merger Conditions Appear Very Standard
All companies involved are based in Delaware. Thus, the merger agreement will be regulated by the Delaware law, which I appreciate. I did not see a financing condition, which most traders will like. The buyer has executed certain commitment letters with third parties to finance the merger including an equity commitment letter.
The closing date is expected to be the second business day following the day when the conditions of the merger agreement are met. The companies will have to wait only for the waiting period applicable under the HSR Act. The companies will also need to receive stockholders’ approval. In my opinion, it does not matter which company buys AEGN, the merger could be closed in three to four months:
Source: Merger Agreement
Investors need to remember that adverse effects, such as changes in the market price or trading volume of the shares, or any change affecting the credit ratings or the ratings outlook for the company, could also prevent the closing. Besides, any failure to meet internal or published projections, forecasts, or consensus estimates may also terminate the merger agreement.
In my view, as we are heading towards the expected closing date, and so far there’s no indication that the financing will be frustrated in accordance with the commitment letters issued back in February, the merger seems to be on the right path towards closing.
Risks And Investment Symmetry
I believe that buying AEGN right now does not involve large risks. If the third party is not interested, the share price will most likely go to the previous offer of $26-$27 per share. In the best case scenario, the financial buyer will try to offer a bit more than $28.5, and the bidding war will continue. With this in mind, I believe that there is an upside potential in the share price.
Currently trading at 9x-11x CFO, AEGN is not only an undervalued company. AEGN also signed a merger agreement, and received interest from another third party. The conditions in the merger agreement are standard. Thus, if AEGN does not sign a merger agreement with the third party, the merger with New Mountain Capital will most likely close. As a result, the downside in the share price is limited.