Tuesday, November 29, 2022
HomeValue InvestingDistressed State of affairs, Pursuing a Compelled Sale

Distressed State of affairs, Pursuing a Compelled Sale

That is doubtlessly a horrible concept, it is just a teeny tiny tracker place, it might go to zero, however I needed to throw this on the market in case others know extra about state of affairs and are sort sufficient to share.

Armstrong Flooring (AFI), the 2016 spin from Armstrong World Industries (AWI), designs and manufactures resilient flooring merchandise and sells by means of distributors otherwise you may stroll by their vinyl tile shows in large field dwelling shops like Residence Depot.  Armstrong is a recognizable title however they are much smaller than market leaders Mohawk (MHK) and Shaw (owned by BRK), for the reason that spin they’ve had a difficult time and now on account of covid provide chain disruptions and ensuing inflation (a few of their uncooked materials prices are up 100%), discover themselves on life assist.  

The corporate has tried to implement value will increase to offset inflation however appear to be a step behind leading to gross margins being squeezed to close zero and the corporate burning money.  Their time period mortgage lender, Pathlight Capital, not too long ago prolonged Armstrong Flooring one other $35MM to repay their ABL facility and shore up the close to time period stability sheet.  A stipulation of the time period mortgage modification was the corporate has to attempt to promote itself ASAP.  From the 8-Ok:

The Firm additionally introduced it retained Houlihan Lokey Capital, Inc. (“Houlihan”) to help with a course of for the sale of the Firm and with the consideration of different strategic options. Based mostly on all of the elements deemed related by the Board of Administrators of the Firm (the “Board”), the Board decided this course of to be in one of the best pursuits of the Firm and {that a} sale of the Firm or one other strategic transaction are one of the best means to maximise worth for the Firm’s stockholders and different stakeholders.

Houlihan is understood for his or her restructuring enterprise, in order that’s a nasty signal and the “and different stakeholders” language on the finish is one other trace {that a} restructuring is an actual risk right here.  Later in the identical 8-Ok:

The Amended ABL Credit score Facility contains sure milestones (“Milestones”) associated to the Firm’s consideration of a sale of the Firm or different strategic options. These milestones embody: (i) a requirement that the Firm ship a confidential info memorandum concerning the sale course of to potential patrons, traders and/or refinancing sources by January 14, 2022, (ii) a requirement that the Firm trigger Houlihan to offer a abstract to the ABL Agent by February 18, 2022 of all written indications of curiosity concerning the acquisition of the Firm or an alternate transaction which can be acquired on or earlier than that date, (iii) a requirement that the Firm notify the ABL Agent by February 28, 2022 whether or not any binding letter of intent for the acquisition of the Firm has been entered into previous to such date and, thereafter, offering copies of any such letter of intent entered into after such date (topic to any crucial redaction), (iv) a requirement that the Firm enter right into a definitive settlement for the acquisition of the Firm by March 31, 2022 which supplies for a purchase order value in an quantity adequate to repay in full the excellent loans underneath the Amended ABL Credit score Facility and the Amended Time period Mortgage Facility and in any other case be in type and substance moderately passable to the ABL Agent, and (v) a requirement that the Firm consummate the sale of the Firm or the same transaction by no later than Could 15, 2022.

Whereas the corporate is bleeding money, the stability sheet does not look horrible, they personal nearly of their actual property and manufacturing services.  Final March, they bought one in every of their manufacturing and warehouse services in South Gate, CA for $76.7MM (seemingly the one with probably the most important worth) which they partially used to pay down debt after which burned by means of the remaining.  I learn a remark someplace that this firm is nice at promoting property, however not operating the corporate, again in 2018 they bought their wooden flooring section for $90MM or 7.2x section EBITDA on the time.  They went on to make use of a lot of the proceeds to do a Dutch tender provide at $11.10/share, the inventory trades under $1.50/share in the present day.

That is previous to the extra liquidity injection, however even proforma, AFI trades a major low cost to e book worth.

New administration, Michel Vermette (previously a division head at MHK), arrived on the scene in late 2019, began to implement a brand new technique, invested closely in a gross sales power, however they’ve run out of liquidity on the improper time.  The model title is value one thing and so are the property, plant and gear on the stability sheet, the flip facet of inflation is the substitute value of those manufacturing services should be important and probably in extra of what they’re carried at on the stability sheet.  However AFI shouldn’t be negotiating from a place of power (no kidding!) and fairness might get utterly worn out.  Fairness holders are principally counting on the kindness of others (or PE flooded with dry powder) to bail them out.

Different ideas:

  • Their outdated hardwood flooring section, now referred to as AHF Merchandise, not too long ago modified fingers between PE sponsors (I did not discover a value or a number of disclosed anyplace), and the debt raised early this month was on lower than favorable phrases, SOFR + 625, which implies the credit score market is reasonably cautious on flooring firms in the present day.
  • They beforehand guided to 10% EBITDA margins in a normalized surroundings, on LTM revenues that might be ~$60MM towards a enterprise worth of $114.5MM ex-pension legal responsibility or $168.7MM with the pension legal responsibility.
  • The market is transferring in direction of “luxurious vinyl tile” or LVT, MHK on a current earnings name stated they are going to make investments $160MM this yr to develop their LVT manufacturing capability.  Two of AFI’s owned manufacturing services produce LVT in the present day, these services plus the model might make it value for MHK or one other strategic purchaser to take out AFI.

Once more, it is a dangerous concept, do your individual due diligence.

Disclosure: I personal shares of AFI



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