September 2002
Industry experts discuss the future of transportation funding
By Therese Dunphy
THE PANEL
E. Dean Carlson, the secretary of the Kansas Department of Transportation, has more than 40 years of experience in the field of transportation. He is the former executive director of the Federal Highway Administration, where he spent most of his career. Carlson participated in the roundtable via phone.
Jay Hansen, vice president of government affairs for the National Asphalt Pavement Association (NAPA), joined the organization in 1998 after more than 12 years as a transportation lobbyist. Hansen serves on many boards, including The Road Information Program (TRIP) board of directors, the American Highway Users Alliance board of directors, and the National Partnership for Highway Quality steering committee.
Joseph A. Manero is the founder of the political consulting and public affairs firm, The Ayes of Texas, and is the political and public affairs manager/managing director for the Planning and Design Division of the ARTBA. He also manages ARTBA’s political action committee, and is a veteran of state and local political campaigns in Texas.
Drew Meyer is vice president of marketing and transportation services for Vulcan Materials Company. He has been with the company for more than 33 years. Meyer is currently vice chairman of the National Stone, Sand & Gravel Association (NSSGA), and he serves on the ConExpo-Con/Agg Long-Range Planning Task Force.
Roger Millar is a principal with the Portland, Ore.-based engineering firm Otak, Inc. Millar is a fellow of the American Society of Civil Engineers (ASCE), past chair of the Pacific Northwest Council of the ASCE, and past Oregon Section ASCE president.
Pamela Whitted is vice president of government affairs for the NSSGA, and the former executive director of the Consuming Industries Trade Action Coalition. She was also director of congressional liaison for the Federal Energy Regulatory Commission during the Reagan Administration and has worked for several members of Congress.
Signed into law in the summer of 1998, the Transportation Equity Act for the 21st Century (TEA-21) was designed to ensure that all funds collected from the federal gas taxes would be spent on transportation improvements, as originally intended under the gas tax law. To date, the financial impact of TEA-21 has been felt from state departments of transportation to engineering firms to aggregates producers.
From 1997 to 2001, production levels in the aggregates industry grew 17.7 percent. But, organizations representing those businesses affected directly by federal expenditures for transportation infrastructure agree that this money is not enough to maintain current highway systems, much less to help pay for new construction.
To better focus the reauthorization debate, AggMan hosted a roundtable at ConExpo-Con/Agg ’02 in Las Vegas.
Highways and Defense
Therese Dunphy: At the National Stone, Sand and Gravel Association’s (NSSGA) Government Affairs Division meeting in Las Vegas, Don Young met with us about potential restoration of highway funding. He implied that if we asked for restoration of more than $6.5 billion, we would be perceived as greedy.
Joseph Manero: That’s not something that we’re too concerned about. People are going to call us anything from A to Z. And we have to keep pressing for what we think is right to spend on transportation. And if they are going to call us greedy, and in the end if we get what we want, it’s okay. But it’s not greedy.
Pamela Whitted: The reason it’s not greedy is the transportation system in this country is so important to our national security. I don’t know that we have done as good a job as we need to do in making this point.
When you think about transportation, it should be just part of the equation on homeland security, and it’s not yet.
Joseph Manero: Let’s not forget how the Interstate Highway System began.
Pamela Whitted: Exactly. Defense.
Drew Meyer: In addition what you have is our economy really is driven by good transportation and the ability to move goods quickly, efficiently, and economically and is a dramatic productivity driver that helps us to maintain our competitiveness in the world market.
So it has very, very little to do with greed. It has a lot to do with making sure that we maintain the leadership that we have in the world.
Joseph Manero: The just-in-time economy depends on getting things that are just in time.
Jay Hansen: Our warehouses are on our highways now and freight traffic is up 225 percent in the last 30 years.
Drew Meyer: There’s very little growth in lane miles and that’s a significant issue.
And it also brings in the fact, though, that we have another mode of transportation called the railroads, who also need funds, even though they are all privately owned.
They need funding as well in order to tie this all together. And if we go back to this whole process where we started, we say we’re not against mass transit, we’re not against railroads, we’re not against anything.
We’re for a very good complete transportation system that the plans are driven by the local people who know what those needs are.
Joseph Manero: Can you imagine on September 11th or September 12th of last year if we didn’t have the Interstate Highway System, how people would have gotten around the country for the next week or so? It would have been a disaster.
By the Numbers
Dean Carlson: I’d like to mention one thing is maybe inside ball, but some of it smarts a little bit. The track record of treasury in putting together figures is not good. It made mistakes in the last five years that have hurt us badly. And not just little mistakes. Their mistakes in crediting fuel tax revenues have been in 10 figures and generally to our detriment…
Right now we’re making our allocations from fuel tax revenues based on the vehicle miles of travel that we send in and if we keep RABA, it would seem to me that it would be nice to have more confidence in the numbers.
States that have kept track of their daily vehicle miles of travel and even the truck sales cannot show that there’s been the kind of reduction that they show in 2001. It’s just nuts.
Drew Meyer: Well, the other part, and I don’t know when or if this will be addressed, is the fact that the revenue forecasts that were included in the budget were based upon estimates made in October or November when everyone thought we were going to have a recession through the first half of this year.
And now it’s clear from the economic data that’s coming out, we had a positive fourth quarter in GDP and some of the later estimates for this first quarter are now up around 5 percent growth at an annual rate for the first quarter of GDP.
Absolutely phenomenal what’s going on. That has to affect the amount of revenues that come into both the trust fund and into the federal government in general.
Joseph Manero: I’d echo what Dean said and what (Drew) said. I’d think if anything, the president got bad advice in this budget.
The number crunchers weren’t really minding the store when they were doing their calculations… It’s one thing to do your math in a back office in Washington all day long and that’s great. But when you leave Washington and translate that to the real world, well, that affects thousands of people.
And it affects the economy on a major scale. I don’t think they took that into account when they did this.
Project Streamlining
Therese Dunphy: I’d like to talk about that in terms getting the rock to the road.
What do you foresee happening on that front? Mary Peters talked a little bit about trying to have one agency head up projects and shortening project lead time. What do you foresee happening there?
Pamela Whitted: Well, Don Young said how important streamlining was to him, and Mary Peters echoed that and both talked about the time it takes to deliver projects.
One thing we have talked about is simultaneous environmental reviews. Now there has been some resistance to the idea at DOT, and I’m still not quite sure I understand why. But simultaneous reviews would help. Mary indicated that project streamlining would be included in the administration’s TEA-21 reauthorization bill which is going to be introduced after the first of next year.
Don Young said that he might want to go forward with a streamlining bill before that. Even this year.
He didn’t say much more than that, but I know that the House transportation committee has been working on both an aviation streamlining bill and highway streamlining. Our information is that they want to do the aviation bill first before highways. (Note: Subsequently, the House committee passed an aviation streamlining bill, and staff has circulated for comment a highway streamlining bill draft.)
Roger Millar: A subtle shift that we have made is we were talking back in the middle of the last bill about environment streamlining. And we used the E word.
What we’re trying to do is now get away from that, to talk about improving project delivery and not make it an environmental issue, because it really wasn’t an environmental issue in the first place. It was a process issue. How do we process projects from one end to the other in a timely manner?
And so now we’re looking for time limits on decision making. Today, we have open-ended decision making where you submit something to an agency and they can just sit on it.
We want decisions made in a timely manner. We would like to see concurrent agency involvement…
Dean Carlson: Well, certainly planning is such an early process that it’s very difficult to get complete environmental reviews at that stage. We don’t have enough specific data that we can answer some of their questions.
The idea that we should have some sort of sign off on what we’re trying to do would be something that would really be helpful. And then we could work out details as we start to develop projects.
I would worry if they actually add some environmental-approval process to the planning process. That should be done by the planning organizations that are doing the work.
Roger Millar: It would be great if planning decisions had some standing in the environmental process. For example, you make a decision through a planning process that it’s going to be a light rail line.
And then you go into the environmental process and have to start back in project scoping from ground zero as regards mode. After you just spent three years figuring out it’s going to be a light rail line.
With NEPA, you’ve had to go backwards that way. So some recognition of the value of the decisions that are made in the planning process that would enable you to start from that planning decision to the environmental process would be very, very helpful.
Jay Hansen: You can streamline the federal review process, great. Have a great solution. But if you don’t do anything to streamline or deal with the process by which local jurisdictions come to resolution on projects going forward, we’re always going to have trouble looking these projects through the process.
I know in Montgomery County where I live they can’t agree on bridges, highways, or transit. So we’re stuck in paralysis and congestion. It’s unbelievable. We’re not moving forward at all.
Shanon Fauerbach: So, maybe those maximum time limits for decision making don’t just belong at the federal level; they belong at all levels?
Jay Hansen: It would help. But there’s no magic bullet in all this. This is a very complicated process.
Roger Millar: Telling a group of citizens that time’s up is very difficult.
Pamela Whitted: That’s what I was going to say. When you start trying to dictate to the local localities —
Jay Hansen: It will end up in court.
Pamela Whitted: Exactly right.
Funding and Air Quality
Shanon Fauerbach: What about air quality standards? In Atlanta, for example, we did not meet our plan’s air quality standards, therefore, we were not provided funding for improving traffic congestion. So, in fact, our air quality became worse because we didn’t have funding to improve the situation. Very ironic. What happens in those situations?
Jay Hansen: Well, one of the issues Congress needs to address is the sanctions. You know, you’re going to sanction areas of the country by withholding their highway dollars if they don’t meet certain standards.
We would like to see Congress do away with that particular sanction.
Joseph Manero: It’s a classic carrot-stick approach. And they’re threatening states with cutting off their highway funds and their transportation funds if they don’t meet air quality standards where it’s the transportation funds that will help them meet the air quality standards.
Jay Hansen: I’ve got it — population in the last 30 years.
Population up 34 percent.
Licensed drivers up 68 percent.
Registered vehicles up 94 percent.
Vehicle miles traveled up 143 percent.
Added road mileage, 6 percent.
Joseph Manero: And yet even with the added road mileage, the air quality in the country was improved dramatically since then.
Now imagine how much better it would be if we had increased capacity beyond 6 percent, which is what we’re pushing to do now.
Therese Dunphy: Is that something that’s going to be resolved? ARTBA and NSSGA, for example, have been involved in the air quality lawsuits through that ASET (Advocates for Safe and Efficient Transportation).
Is that something that’s going to happen via litigation?
Pamela Whitted: Well, I think it’s conformity issues you’re talking about. Conformity is going to have to be addressed in TEA-21 reauthorization. It’s something we want to see addressed.
We think that if projects have been approved and a city falls out of compliance with the Clean Air Act, those projects shouldn’t be put on hold.
You know, our concerns about Atlanta, Sacramento, and other cities is why we formed the ASET. We felt we had to go to court to challenge actions that threatened billions of dollars of highway projects.
But certainly conformity and correcting that problem has to be addressed in TEA-21 reauthorization.
Joseph Manero: Well, the real problem with that, the reason we’re getting into these lawsuits oftentimes is to provide backbone for state and local governments who don’t necessarily want to be seen as the bad guy pushing more highway funding and more transportation funding at the expense of the environment.
They are not mutually exclusive. We think they are going hand in hand very well. And the problem is groups who are anti-growth — I don’t call them pro-environment. We’re pro-environment. They are anti-growth. It’s not about the environment. To these groups, it’s about stopping growth wherever they can. And they use delay tactics every step of the way through the project approval process to get their way.
And that’s why we have enlisted several other groups to form the Advocates for Safe and Efficient Transportation (ASET). And we have won some pretty impressive victories in Sacramento and Atlanta.
Pamela Whitted: Atlanta has now been appealed. Environmental groups asked that all pending cases be dismissed in order to move to the appeals process.
Joseph Manero: It’s about eight or nine different states that are involved in there. Some of them precedent setting.
Pamela Whitted: The four cases where ASET has been involved have allowed around $40 billion worth of highway projects to go forward. We think this is very important. Without ASET’s involvement, these projects would have been suspended.
Mergers & Acquisitions Analysis
Rinker Materials Acquires Kiewit Materials Company
The major M&A news for the past month was the announcement July 10 that Rinker Materials Corporation (Rinker), the U.S. construction materials subsidiary of Australian-based CSR Limited (CSR), would acquire Kiewit Materials Company through a cash tender offer of $17 per share. The process requires that at least 90 percent of the shares are tendered by Sept. 25, 2002. The transaction cleared anti-trust provisions of the Hart-Scott-Rodino Act Aug. 5. The purchase price for Kiewit approximates $540 million, subject to certain closing conditions. On a trailing 12-month basis, the company generated $73.6 million of EBITDA on total sales of $509 million (14.5 percent EBITDA margin). In its offering materials to potential parties, Kiewit projected $510.6 million of revenues and $52.9 million of operating profit for fiscal 2002.
Based on the most recently published financial statements for Kiewit, the purchase price represents a 7.3x multiple of trailing 12-month EBITDA (excluding certain one-time non-cash expenses). Although Kiewit’s shares were not publicly traded, the company was required to file financial statements with the SEC because its shareholder base exceeded a certain amount. Its shareholders are almost entirely current or former employees of former parent Peter Kiewit Sons, Inc., and existing management. Directors and executive management own approximately 25.1 percent of the fully-diluted shares outstanding, with the remainder broadly held by current or former employees.
Kiewit was spun out of its former parent in September 2000. The company was built through smaller, regional acquisitions, with a strong focus in the Western states. Kiewit was somewhat acquisitive during the past 10 years, acquiring 16 companies, leading to revenue of $509 million in 2002 compared to $40 million in 1992 (average acquisition size of approximately $30 million in revenue absent internal growth). Revenue breakdown for the most recent fiscal year was as follows:
• Ready-Mix Concrete — 56 percent;
• Aggregates/Other — 26 percent; and
• Asphalt — 18 percent.
Based on recent USGS data, Kiewit is the 16th largest producer of aggregates in the United States, and the sixth largest producer of sand and gravel. Kiewit’s operations include 44 aggregate facilities, 60 ready-mix concrete plants, and 16 asphalt plants. The company’s reserve base exceeds 800 million tons, which only equates to an average life of roughly 29 years based on current production levels. Kiewit owns roughly 468 million tons of aggregates reserves and leases the remainder with royalty rates ranging from $0.35 to $1.45 per ton. Approximately 31 million tons of these reserves are located at dormant aggregate production facilities. Ready-mix concrete and asphalt production totaled 4.7 million cubic yards and 3.4 million tons, respectively, in its most recent fiscal year.
Kiewit’s major geographic business units include:
• Arizona – United Metro Materials (UMM);
• Northern California – primarily Solano Concrete in the San Francisco Bay area;
• Pacific Northwest – primarily Washington state; and
• Quarries Group – additional facilities across the western United States.
Clearly, Kiewit’s most desirable asset is its dominant position in the Arizona market (red dots on the map on the left), the second-fastest growing state in the United States. The Arizona business represented 78 percent of total company sales and 70 percent of EBITDA for the most recent fiscal year. UMM operates 28 sand and gravel sites in Arizona (more than 60 percent of total company sites), with annual production of approximately 13.4 million tons. The majority (22) of the sites are leased. The average life of the locations varies — roughly 24 years in the higher growth Phoenix market with 8.75 million tons of annual production, to five years in Campe Verde with 435,000 tons of annual production.
UMM also operates 13 ready-mix locations in the Phoenix metropolitan area, and an additional 32 plants throughout the state. The division produces more than 3 million cubic yards of concrete in the Arizona market. Volume breakdowns are equally split between residential and commercial concrete. In addition, UMM operates four asphalt plants in the Phoenix metropolitan area, producing approximately 1,600 tph at full capacity, with another eight asphalt plants throughout Arizona (mostly wholesale with limited paving operations).
The genesis for the transaction began October 2001. Kiewit management and its Board of Directors discussed the challenges the company was facing in the pursuit of its growth strategy. The major challenge identified was finding acquisition targets at “acceptable prices.” Although Kiewit had substantial debt capacity (conservatively estimated at $225 million) and almost $100 million of cash on hand, the company did not aggressively pursue acquisitions as strongly as the major industry consolidators. Many of the acquisitions historically consummated by Kiewit were purchased at transaction multiples below then-current industry levels. Despite its strong balance sheet capable to support an acquisitive growth strategy, the Company did not adopt a similar strategy as CSR, Hanson, Martin Marietta, and other major construction materials firms. Kiewit management and the board decided that it could not effectively compete in this era of consolidation, and decided to explore the sale of the business.
Contrary to industry standards and M&A “best practices,” the company charged a board member to direct the process, including identifying potential parties and valuing the business. In mid-January 2002, Kiewit provided confidential material to nine potential parties subject to a confidentiality agreement. By February 2002, four of the nine parties provided Kiewit with an initial indication of interest for the business. That group was invited to tour Kiewit’s Arizona facilities and begin to conduct other due diligence. On May 13, two of the four parties (other group is unknown at this point) submitted a final proposal to acquire Kiewit. After some negotiation, CSR was chosen as the most likely suitor and was granted a 30-day exclusivity period to finalize its due diligence. The final terms were eventually agreed upon, and the board approved the transaction July 8.
With the Kiewit acquisition, Rinker will become the fifth largest domestic aggregates producer, supplying more than 84 million tons per year, and the second largest producer of pre-mix concrete, supplying more than 13 million cubic yards annually. However, on the surface the transaction does not provide many synergies for Rinker. Kiewit had some overlap with Rinker in Las Vegas and Washington, but not of sufficient size to provide significant regional synergies. Rinker has expanded its market presence in new growth territories and can now focus on those regions for expansion, particularly Arizona. In our opinion, Solano Concrete and the assets in the Washington area already face some size disadvantages in their current markets from more established regional and national firms. These assets may have more trading value for CSR than operational value.
Following are other interesting observations from the transaction:
Financial
• Transaction multiple of 7.3x EBITDA appears fair based on the current trading multiples for public companies (refer to Public Market Analysis, page 10), and even stronger when compared to more focused ready-mix companies.
• The purchase price multiple is much lower than previous large CSR acquisitions — 8.7x EBITDA for Florida Crushed Stone and almost 12x for American Limestone. However, both of those transactions were consummated in mid-2000 during the last consolidation boom and both had a larger component of aggregates and were more strategic in nature (i.e., regional add-ons).
• The transaction appears to be dilutive to new parent CSR — the purchase price multiple exceeds CSR’s current publicly traded multiple. In addition, Kiewit is a lower margin business when compared to CSR.
Legal/Documentation
• Fiduciary duties of engaging a board member/shareholder to lead the sell-side engagement and to provide a fairness opinion, rather than an independent third party.
• No customary post-closing adjustment for the transaction.
• Indemnification provisions extend for six years, compared to more market level terms of two years for larger construction materials transactions. However, there is no proposed escrow in the merger agreement.
• Greater than 4-percent break-up fee paid by Kiewit if it terminated the agreement to pursue another transaction — median for public transactions is 3.5 percent.
• Longer-term supply issues in the Arizona market for fast depleting resources — new sources, other acquisitions, or alternative transportation methods to supply product from outside the region.
Strategic
With the announced Kiewit transaction and the most likely termination of the Cemex/TCL deal (see below), total industry M&A transaction volume remains at 18 deals year-to-date through July.
The Kiewit transaction is the largest deal in the industry since the Lafarge/Blue Circle merger in January 2001, and the largest private company transaction in the past five years. Kiewit’s strategic decision to sell the business echoes many of the same concerns shared with other private company owners in the industry. This recently announced transaction may spur the impetus for another consolidation boom in the construction materials industry.
—Bill Watkins
Brown, Gibbons, Lang & Company, L.P.