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Based in Houston, Texas, GSE Holding (proposed GSE) scheduled a $126 million IPO with a market capitalization of $238 million at a price range mid-point of $14 for Thursday December 15, 2011.

A total of 11 IPOs to raise $3.5 billion the week of December 12, includes Zynga (ZYNG). See the full IPO calendar.

SUMMARY & CONCLUSION

GSE is a leveraged buyout by a private equity firm that is not working out very well.

Since 2008:

  • GSE generated losses since 2008, except for a small $1.9 million profit for the nine months ended September 2011.
  • Gross margins have ranged from 11% to 15%
  • Interest payments have been significantly more than operating earnings, except for the nine months ended September 30, 2011, when interest payments were ‘only’ 75% of operating earnings.

VALUATION

  • 94 times earnings annualized for the nine months ended September 2011, is too high.
  • In addition, the private equity owners have severely weakened the balance, indicated by a price-to-tangible book value of 7.6. The private equity leveraged buyout owners have clearly stripped the company of as much cash as they could, and have paid themselves substantial cash dividends.

In light of the above, no wonder shareholders want to sell 40% of the IPO.

And GSE wants to sell 53% of the company on the IPO. 53% is a very high percentage and is a sign of future weakness, because when GSE needs to raise more money, it may well do so at a lower price, thereby diluting investors who may have paid the IPO price. Therefore, it seems prudent to pass on the GSE IPO.

BUSINESS

GSE makes synthetic linings for hillsides, solid waste containment, oil containment, concrete protection, etc.

MARKET

A&M (market research) estimates that the market for geosynthetics used in environmental containment applications will be approximately $1.7 billion in 2011, and is expected to grow at an annual rate of 7% to approximately $2.2 billion by 2015.

According to A&M, GSE is the largest market participant with 24% global geomembrane market share, and is the market leader in several key markets and geographies, as shown by a 40% market share in the mining end market, a 19% market share in the waste management end market, and a 11% market share in the liquid containment end market.

The industry is highly fragmented due to its relevance to a wide variety of products, applications, end markets and geographies. For the most part, other market participants are small, privately held companies that compete on a local or regional basis and offer only one or a few products.

CUSTOMERS

GSE serves leading mining, waste management and power companies; independent installers and dealers; general contractors and government agencies.

GSE solutions have been integral components of projects by large, well-established and well-known companies such as Arizona Public Service Company, Inc., Barrick Gold Corp. (NYSE:ABX), BHP Billiton plc, the Charoen Pokphand Group Co. Ltd., Newmont Mining Corp. (NYSE:NEM), Rio Tinto Limited (NYSE:RIO), Veolia Environnement S.A. (NYSE:VE) and Waste Management, Inc. (NYSE:WM)

PRINCIPAL SHAREHOLDER

CHS Capital™ is a Chicago-based private equity firm with 23 years of experience investing in the middle market. CHS targeted well-managed companies with enterprise values between $75 - $500 million,

INTELLECTUAL PROPERTY

GSE has received patents from the U.S. Patent and Trademark Office. Some of these patents have been issued in select foreign countries and certain patent applications are being prosecuted in such jurisdictions

COMPETITION

The geosynthetics industry is relatively fragmented due to the wide variety of products, functions, markets and geographies. GSE is one of the few companies that offer multiple types of geosynthetic products.

GSE estimates that over 150 companies produce geosynthetics and that there are 30 companies that compete in the production of geomembranes, which is GSE’s largest product type.

GSE’s primary in North America and Europe is Agru Kunststofftechnik GmbH, or Agru, a family owned company based in Austria, which focuses primarily on piping systems. This company's American affiliate, Agru America, produces geomembranes and other geosynthetics primarily for lining applications to protect against leaching wastes and fluids from reservoirs. Agru has facilities in Austria, Germany and the United States.

In less developed regions of the world, the competitive landscape is more fragmented than in the United States and European markets. Many competitors in these developing regions are low-cost geosynthetic manufacturers that lack the product quality and consistency to compete in more mature markets. As international regulations become increasingly stringent, greater importance will be placed on manufacturers that have the technical expertise and industry certifications required to supply geosynthetic products that comply with these regulations.

USE OF PROCEEDS

Of $68 million the sale of 5.4 million shares.

  • Repay $40 million of debt
  • $3 million to terminate management agreement
  • Balance for working capital and general corporate purposes
  • Shareholders intend to sell 3.6 million shares, or 40% of the IPO
Source: IPO Preview: GSE Holding