Is Mueller’s Pipe Sale The Right Move? (MWA)

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Mueller Water Products, Inc. (NYSE: MWA) is seeing its shares surge on news that it will sell its U.S. pipe business to private equity firm Wynnchurch Capital for almost $90 million plus a reimbursement agreement estimated at up to $10.2 million.  While Mueller will be able to cut its debt and will focus on newer technologies and on higher margin operations, we cannot help but wonder if today’s move is the right one or not.  The stock is up nearly one-fifth, but there may be more to this story down the road.

Mueller will now pay down debt and use the rest of the funds for general corporate purposes.  The company noted that this improves its leverage on a pro forma basis from 6.7x to 4.6x as net debt/adjusted EBITDA from continuing operations for the trailing 12 months ended December 31, 2011.

The company has three units of Mueller Co., U.S. Pipe and Anvil and it notes on its website, “Our broad product portfolio includes engineered valves, fire hydrants, pipe fittings, water meters, ductile iron pipe, leak detection and pipe condition assessment which are used by municipalities, as well as the residential and non-residential construction industries.

With all of the water infrastructure that is going to be needed in tha U.S. alone over the next two decades, it is fair to ask whether or not this was the right move.  The company referred to the pipe operations as volatile and as having masked the company’s real value. It is fair to wonder if all of Mueller’s other sales will go along as smoothly without the pipe business being able to be bundled in infrastructure offerings.  Unfortunately, that can be an issue.

The most obvious benefit is the debt pay down as Mueller had $677 million in long-term debt at last look.  After a 19% gain to $3.40 today, the market cap is $530 million.

The water sector is already difficult to invest into.  Now there is one less aspect of the water sector to invest in.

JON C. OGG