Sandblast: Fairmount Santrol sets terms for $1 billion IPO next week

FMSA Holdings, an LBO'd global provider of sand and sand-based products to oil and gas E&Ps, announced terms for its IPO on Monday. The Chesterland, OH-based company plans to raise $1 billion by offering 44.5 million shares (100% insider) at a price range of $21 to $24. At the midpoint of the proposed range, FMSA Holdings would command a fully diluted market value of $4 billion.

Business
Fairmount Santrol notes that it has one of the largest sand reserves and processing asset bases in the industry, including about 800 million tons of proven mineral reserves, 11 active sand processing facilities with 12 million tons of annual sand processing capacity, a resin manufacturing facility and 11 coating facilities with 2.4 million tons of annual coating capacity. Its logistics and distribution capabilities include 46 terminals and over 8,500 railcars, which it expects to grow to 13,000 through 2016. For the six months ended June 30, 2014, customers Halliburton and FTSI represented 36% of sales. In September 2013, it completed a major acquisition of sand reserves and logistics assets from FTSI for about $350 million.

Backer
American Securities bought a controlling stake in predecessor Fairmount Minerals in 2010, and the private equity firm will own a 37% post-IPO stake in the company. The private equity firm was behind the July IPO of Advanced Drainage Systems (WMS), which remained flat on its debut but has traded up about 24% in the aftermarket. American Securities also has a controlling stake in August filer Metaldyne (MPG).

Frac sand IPOs
The company is a peer to 2012 IPOs US Silica Holdings (SLCA) and Hi-Crush Partners LP (HCLP), both of which trade over 200% above their IPO price. In 2013, frac sand producer Emerge Energy Services LP (EMES) was a top-performer, and now trades over 550% above its offer price. An MLP with a minor frac sand segment, Mammoth Energy Partners LP (TUSK), recently filed for a $100 million IPO.

Recent financials
Revenue increased 40% to $629 million for the six months ended June 30, 2014, primarily driven by higher volumes delivered to FTSI and a price increase for raw sand, partially offset by adverse weather and logistical constraints. Gross margin fell 430 bps to 36% due to both lower selling prices for resin coated products and a shift to lower-margin coated products. Adjusted EBITDA rose 23% to $180 million (28.6% margin), held back by a lower gross margin. Capital expenditures also rose about 50% to $62 million. Fairmount Santrol held $1.3 billion of debt at quarter end (3.9x LTM EBTIDA). As American Securities is selling the entire float, IPO proceeds will not be used to pay down debt.

FMSA Holdings, which was founded in 1986 and booked $1.2 billion in sales for the 12 months ended June 30, 2014, plans to list on the NYSE under the symbol FMSA. Morgan Stanley, Wells Fargo Securities, Barclays, Goldman Sachs, Jefferies & Co., J.P. Morgan, KeyBanc Capital Markets and RBC Capital Markets are the joint bookrunners on the deal. It is expected to price during the week of September 29, 2014.