Deal Profile: A tailored, strategic process yields a premium outcome for EP Minerals

In May 2018, U.S. Silica Holdings, Inc. (U.S. Silica), a leading producer of commercial silica primarily used in the oil and gas industry, completed the acquisition of EP Minerals (EP), a leading global producer of engineered materials derived from industrial minerals, including diatomaceous earth (DE), clay (calcium bentonite), and perlite. U.S. Silica valued EP at $750 million, or 12.5 times adjusted EBITDA. 

Harris Williams & Co. Managing Director Tim Webb and Director John Lautemann, both in the Industrials Group, explain the factors that made EP a desirable acquisition for U.S. Silica and how the team helped drive the optimal outcome for its client.

Key Takeaways

• EP has transformed itself into an application development platform, collaborating with customers to engineer innovative new ways to use its products. This strategic transformation has created the potential to double EBITDA over five years.

• Harris Williams & Co. planned and executed a highly tailored approach to communicate EP’s value to a targeted group of aggressive strategic buyers, fostering a very competitive sale process at the final stages. 

• This focused approach ultimately resulted in a purchase price of 12.5 times adjusted EBITDA. Most importantly, both buyer and seller achieved their intended outcomes in an accelerated timeframe. 

EP’s broad portfolio of industrial minerals is recognized globally for quality and consistency, a function of both superior reserves and best-in-class processing capabilities. Its products are used as filtration aids, absorbents, and functional additives for a variety of industries, including food and beverage, biofuels, recreational water, oil and gas, farm and home, landscape, sports turf, paint, plastics, and insecticides. In total, EP serves more than 10,000 customers across over 60 end markets.

As Webb explains, “There is considerable ‘stickiness’ among certain customer categories, for whom switching to a different source of DE may cause the need to reformulate their product to maintain a consistent taste. That’s something they are hesitant to do.” 

EP’s market dynamics are attractive as well. For instance, the recurring, consumable nature of certain products provides steady revenue, yielding consistent EBITDA growth over a decade, and 10% revenue growth through the most recent economic downturn. In addition, Webb explains, the company operates in a unique market structure, in which it is generally one of the largest or second largest providers to a variety of industries.

Plus, as noted by Lautemann, “EP provides an important product to its customers, but also a low-cost product relative to their overall production. At less than 1% of the customer’s unit cost, customers are unlikely to prioritize a search for lower-cost alternatives.”

Building on this strong position, EP has recently transformed itself from a stable, leading provider of DE to an application development platform, working proactively with customers to engineer innovative new ways to use industrial minerals in their manufacturing processes.

Significant investments in the R&D function have been key to this shift, as has been improved communication throughout the organization. Indeed, the company has invested in both R&D personnel and capabilities, resulting in multiple new product introductions over the last few years. It also has developed a proven M&A platform, with two recent strategic acquisitions, and has heightened its focus on value-added distribution partners. Overall, this strategic shift has resulted in a host of valuable new product concepts, creating the potential for EP to double EBITDA over the next five years.

Clearly, with a stable foundation and a strong new product pipeline, EP had an appealing story to tell potential buyers. The team planned and executed a highly tailored approach to communicate that story to a targeted group of aggressive strategic buyers, fostering a very competitive sale process at the final stages. 

Early education period

Harris Williams & Co. worked with management to develop EP’s optimal positioning, prepare materials, and develop financial and industry reports. Through ongoing dialogue and targeted outreach, Webb and Lautemann educated a limited group of strategic buyers on EP’s transformation. The most aggressive buyers then held informal meetings with EP’s management.

Preliminary diligence

All of the buyers that had introductory meetings pushed aggressively to conduct preliminary diligence. The team gave these buyers access to a preliminary data room to help them develop substantive indications on value, while minimizing time required from management.

Comprehensive diligence and final result

Harris Williams & Co. then created a path for these motivated buyers to proceed as quickly as possible. Multiple parties completed their diligence and submitted final offers, creating competitive tension that contributed to a favorable result.

While EP’s many attractive qualities were foundational to driving a premium outcome, Harris Williams & Co. believes four key factors helped achieve this result in a short timeframe.

1. Strong strategic relationships

The firm was able to leverage its extensive industry relationships to develop a customized strategy with a small number of strategic acquirers. “This is an increasingly popular approach for sellers to the extent that the dynamics are conducive, namely ensuring multiple high-potential groups are motivated to own the asset,” says Lautemann. “When done right, working with a limited group of strategic buyers can result in the optimal outcome, while minimizing the burden on management, and in turn the disruption to the business.”

As Webb points out, conditions were right for a targeted approach. “There are not many large industrial mineral platforms that come to market. EP has the scale and scarcity that created a very attractive asset to a handful of strategic buyers.”    

Harris Williams & Co.’s deep relationships and familiarity with the strategic buyer universe allowed the firm to identify the most likely groups to show high levels of interest in EP. Harris Williams & Co. was able to create competitive tension to drive a premium outcome, while only approaching a limited number of strategic acquirers.

2. Up-front preparation

Early preparation of key analyses and a comprehensive data room were critical to facilitating expedited buyer diligence, preparing for key buyer focus areas, and minimizing the burden on management

For example, EP’s recent historical performance was not consistently “up and to the right,” explains Webb. As such, he says, the team created a financial packet for the last several years that included management discussion and analysis to help explain event-driven trends. “We worked to be proactive in terms of explaining what was going on with the business, including an industrial recession and a port strike on the West Coast. We put together a very detailed packet of historical performance with commentary.”

This financial packet highlighted the strength of the EP platform and its ability to grow despite industry headwinds, and was one of many examples of key deliverables Harris Williams & Co. prepared to get ahead of key buyer focus areas.

3. Validation of the growth story 

EP’s industry-leading product development platform was poised to drive significant top-line growth while enhancing margins with a number of exciting new products and market applications. However, these initiatives were in the early stages of adoption and had yet to be meaningfully realized in actual financial performance. Therefore, it was critical to substantiate the company’s higher forecasted growth from its product development pipeline. 

The Harris Williams & Co. team worked with management to prepare a five-year forecast, which was supported by EP’s product pipeline. In addition, EP commissioned a third-party market study to quantify its new product opportunities and validate the market’s expected adoption. The study included customer and industry surveys, market sizing, and long-term growth estimates.

EP also worked with a law firm to validate the intellectual property associated with its new products. “There’s a lot of IP around these new products, and some patents were pending,” says Webb. “We knew this would be a critical area of diligence, and having a third-party report helped provide buyers comfort that the patents would in fact be granted and that they would be protected.”

4. Anticipation of buyer data needs during due diligence

Many firms anticipate buyer needs, but Harris Williams & Co. took it a step further. Lautemann attributes this to experience: “I think the depth of our experience allows us to anticipate where buyers are going to focus their diligence. We thought critically about what was really going to be important in the process, and which questions would be asked, and we got in front of it.”

According to Lautemann, the team created internal analyses, third-party reports, and other documents that proactively addressed key issues while creating a medium that was easy for buyers to digest. Examples of key diligence topics included the earnings base, plant capacity, capital expenditures profile, and real estate documentation, among others.

This comprehensive and anticipatory approach paid off, delivering a successful outcome with a purchase price of 12.5 times adjusted EBITDA in less than five months.

The acquisition was enormously valuable for U.S. Silica, providing diversification from the cyclical oil and gas business. It was a significant step toward a more diversified industrial platform, in line with a strategy U.S. Silica had communicated to its shareholders and the market at large. 

“EP checks all of the boxes in terms of what we’ve been looking for in an attractive, adjacent business to our ISP [industrial and specialty products] segment,” said Bryan Shinn, president and chief executive officer of U.S. Silica. “It is a rare find with an attractive market structure and has industry-leading margins with exciting opportunities to grow sales. It has strong IP protection and leverages our core competencies as a premier surface mining and logistics company. EP’s reliable cash flow also complements our oil and gas segment while providing a robust platform for expansion and growth through organic opportunities and strategic bolt-on acquisitions.”¹

Thanks to a well-planned and -executed process, tailored to the specific needs and circumstances of EP Minerals, both buyer and seller were able to achieve their intended outcomes in an accelerated timeframe. 

Published June 2018