Forterra (Pending:FRTA) filed an S-1/A with the Securities and Exchange Commission, announcing its intention to make an initial public offering. The company hopes to raise up to $386.2 million by selling 18.4 million shares at an expected price range of $19 to $21 per share. The company also has an additional 1,381,500 shares as an over-allotment option for its underwriters. The underwriters for the offering are Goldman, Sachs & Co., Citigroup, Credit Suisse, Barclays, Deutsche Bank Securities and RBC Capital Markets.

Business overview

Forterra, Inc. was formed by Lone Star Fund I.X. L.P. in 2015, when it acquired several building products companies, combining them to form Forterra. Forterra is a holding company that is owned and controlled indirectly by Lone Star Fund. It manufactures pipes and precast products for water infrastructure in the U.S. and in Eastern Canada. Forterra manages 96 different manufacturing facilities.

The company reports that the crumbling water infrastructure will require nearly $1 trillion in new spending between 2010 and 2035 to make needed repairs and replacements. In 2018, the U.S. storm water and wastewater infrastructure markets are projected to be $10.4 billion and the potable water distribution market is projected to be $7.9 billion.

Executive management team

The chief executive officer of Forterra is Jeffrey Bradley, who has served in that role since Sept. 2015. Bradley has also served as a member of the board of directors for the company since July 2016. Previously, Bradley served as the CEO of Globe Specialty Metals from 2008 until 2015. Before that, he served as the CEO and chairman of Claymont Steel and in various roles at Worthington Industries. He holds a Bachelor of Science in business administration from Loyola University.

William Matthew Brown serves as the executive vice president and chief financial officer for Forterra. He has been with Forterra as the CFO since Aug. 2015 and as executive vice president since April 2016. Before that, Brown was the CFO and senior vice president of U.S. Concrete, Inc. from Aug. 2012 through Aug. 2015. He previously held key roles at U.S. Concrete, Drummond Company and at Citigroup Global Markets, Inc. Brown holds an MBA from The Wharton School of the University of Pennsylvania and a Bachelor of Science in mechanical engineering from the United States Naval Academy.

Financial highlights and risks

In the predecessor period leading up to the acquisition from Jan. 1, 2015 to March 15, 2015, Forterra reports its predecessor companies had net sales of $132.6 million, an adjusted EBITDA of $3.3 million and a net loss of $5.8 million. It reports that during the successor period following the acquisition between March 15, 2015, and Dec. 31, 2015, the company had net sales of $722.7 million, an adjusted EBITDA of $60.2 million and a net loss of $82.8 million.

The company plans to repay its junior loan with $260 million of the proceeds of its IPO as well as a prepayment penalty fee of $7.8 million. It also intends to use $36 million to repay its senior loan. Forterra anticipates spending the remainder on operating costs and for working capital.

Forterra identifies the cyclical nature of the residential and non-residential construction markets as a risk factor for it because it depends on both. The company also reports that a large percentage of its projects are government-funded, so any reduction in money allocated to those projects could hurt the company's profit-making ability. The company also identifies the highly competitive nature of its industry as a risk factor for its success.

Industry peers

Forterra identifies multiple companies as its primary competitors. In its drainage pipe and products segment, the company states that Rinker Materials (a unit of CEMEX, S.A.B. de C.V.) and Oldcastle, Inc. (a unit of CRH plc) are its primary competitors. In its water pipe and products segments, it identifies American Cast Iron Pipe Company and McWane, Inc. as its primary competitors.

Using sales for FY 2015, Forterra has a 1.52 price/sales multiple; this comes in only slightly higher than Cemex's 0.4 price/sales and CRH's .9 P/S; and is in-line with the industry average of 1.3.

Conclusion: Consider A Modest Allocation

Forterra's short operational history as a standalone company, combined with the difficulty of valuing it because it was assembled out of multiple acquisitions; makes us somewhat cautious. At the same time, the water infrastructure market is expected to greatly expand, making the company's potential prospects good.

We recommend that investors consider making modest allocations to this IPO.