IPO Preview: Thermon Group Holdings

| About: Thermon Group (THR)

Thermon Group Holdings (proposed THR) is scheduling a $130 million IPO with a market capitalization of $377 million at a price range mid-point of $13 for Wednesday, May 4, 2011. IPO calendar includes 7 others for this week.

CONCLUSION -- Based in San Marcos, Texas, THR is in a prosaic business that provides a system to maintain or raise the temperature of pipes & vessels. THR has a significant global foot print and is the second largest in the industry.

THR sales are expected to be up 23% to $238 million for the fiscal year ended March 31, 2011, from $193 million for fiscal 2011. THR is a product of a leverage buyout April 30, 2010, and remains leveraged.

Backing out acquisition costs the P/E multiple for the year ended March 31, 2011, is 15: adjusted earnings are expected to be $25 million, up from $7 million in 2010. Page 6, S-1 THR has a negative price-to-tangible book value: -3.1.

A P/E of 15 seems reasonable if THR can continue to increase top line revenue and maintain profit margins.

THR Valuation Metrics

BUSINESS -- THR believes it is the second largest industrial electric heat tracing (used to maintain or raise the temperature of pipes and vessels) company in the world, significantly larger than the next largest competitor and one of only a few solutions providers with a comprehensive suite of products and services, global capabilities and local on-site presence.

THR has a 56-year history, has an installed base operated by thousands of customers and long-standing relationships with some of the largest companies in the world that drive the spending decisions for the major facilities that require THR products.

RECURRNG REVENUE -- THR's existing installed base generates significant recurring revenue. On average, annual recurring maintenance, repair and operations and facility upgrades or expansions (MRO/UE) expenditures generated from an installed heat tracing system are 5 to 10% of the initial cost of the system and expansions may require approximately 10 to 20% of the initial cost of the system.

THR estimates that 60% of revenues in fiscal 2010 were generated from MRO/UE sales. THR believes it has the second largest installed base in the industrial electric heat tracing industry

MARKET -- Alvarez & Marsal Private Equity Performance Improvement Group, LLC, or A&M, estimates that the market for industrial electric heat tracing is approximately $1 billion in annual revenues and estimates that it is growing its share of the overall heat tracing market as end users appear to continue to favor electric heat tracing solutions over steam heat tracing solutions for new installations.

When revenues for steam heat tracing parts are included, A&M estimates the overall addressable market for heat tracing is approximately $2 billion in annual revenues.

TRANSACTION SUMMARY -- On April 30, 2010, private equity firms acquired THR for $320 million, borrowing $210 million and presumably providing $100 million ‘short term’ equity.

The lead private equity firms plan on taking $75 million of the $81 million going to selling shareholders, substantially reducing their equity investment. And the two lead private equity firms will retain 42% of THR valued at $158 million, at the price range mid-point of $13

SELLING SHAREHOLDERS -- Two private equity shareholders who own 75% pre-IPO are sellilng 30% of their stock: CHS Private Equity V LP(1), owns 56% pre-IPO; Thompson Street Capital Partners II, L.P owns 19% pre-IPO

COMPETITION -- The most significant competitor is Tyco Thermal Controls, a subdivision of Tyco International Ltd (NYSE:TYC).

The global industrial electric heat tracing industry is fragmented and consists of approximately 40 companies that typically only serve discrete local markets and provide a limited service offering.

THR believes it is the second largest participant in the industrial electric heat tracing market and one of only a few solutions providers with a comprehensive suite of products and services, global capabilities and local on-site presence.

USE OF PROCEEDS -- $46 million from sale of 4 million shares. Shareholders intend to sell 6 million shares for $81million.

  • $21.6 million to prepay $21.0 million of the $189.0 million principal amount of 9.500% Senior Secured Notes that will be outstanding immediately prior to this IPO, leaving $168 million in Senior notes.
  • The 9.500% Senior Secured Notes were issued in connection with the Acquisition by THR’s wholly owned subsidiary, Thermon Industries, Inc. The proceeds were used to fund a portion of the purchase price for the Acquisition.
  • Balance for general corporate purposes

CASH ON HAND PRE-IPO will be used to pay $7.4 million to private equity ‘sponsors’ for termination of management contract, and to pay an additional $21.6 million to reduce the Senior Notes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.