Quick Pitch: MRC Global (MRC)

Potential Company Sale – 30%+ Upside

Clark Street Value has highlighted an intriguing potential sale opportunity involving MRC Global, a distributor of pipes, valves, and fittings to the upstream/downstream and gas utilities sectors. Recent rumors suggest that MRC has engaged an advisor to explore a potential sale after receiving interest from private equity firms. These reports follow earlier rumors that activist investor Engine Capital (4% rumored stake) sent a private letter urging MRC to evaluate strategic alternatives. Earlier this year, the company had also faced a dispute with its convertible preferred shareholder, who obstructed MRC’s debt refinancing process (due to mature next year) and managed to put it on hold. Company sale would offer an elegant solution to all of these challenges – impending debt maturity, an unhappy preferred shareholder, and an activist pushing for a sale. Engine Capital has reportedly estimated that MRC could fetch $14-$18/share in a sale, representing over 30% upside from current levels.

Nonetheless, I find the valuation to be a bit tricky here. Engine Capital’s target would imply 7x-8x TTM adj. EBITDA multiples, while currently MRC trades at 5.6x TTM adj. EBITDA. The closest peer in terms of size and overall profile DNOW trades at 4.9x TTM adj. EBITDA. DNOW has greater exposure to the more cyclical and less attractive upstream business, but it also holds a substantial net cash position compared to MRC’s leveraged balance sheet (2x+ net leverage, counting convertible prefs as debt). Additionally, MRC’s differentiated and higher quality gas utility segment is currently facing headwinds due to clients’ inventory destocking, a situation that management expects to persist for a few more quarters. Larger, higher-margin, and more diversified distributors, such as FERG ($34bn market capitalization), trade at low double-digit adjusted EBITDA multiples. Overall, it seems reasonable for MRC to fall somewhere between DNOW and the industry giants in terms of valuation in a sale scenario, but it is difficult to pinpoint any exact location within that range, especially when historically MRC used to mostly trade quite close to DNOW and sometimes even below.

More background on MRC and the industry can be found in these two VIC pitches here and here.

The primary risk lies in the fact that the situation remains at the rumor stage, and the sale may not materialize. The downside to pre-announcement levels (before the initial rumors about Engine Capital’s letter) is 7%, but it could be larger considering MRC’s soft recent Q3 results. Peer DNOW’s share price has also declined by 12% during this period.

Engine Capital is an activist hedge fund established a decade ago. The fund possesses extensive experience in the industrial distribution sector and has held numerous positions/campaigns in the space, including FERG, Wesco Aircraft (sold to Platinum Equity), SIG, and Nexeo Solutions (sold to Unilever).

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1 thought on “Quick Pitch: MRC Global (MRC)”

  1. Alluvial Capital shared a pitch on MRC in its Q4’23 investor letter. The key points are similar, but Alluvial provides a bit more color on the situation, including on MRC’s preferred stockholder Cornell Capital.

    Pasting the full pitch below:

    Another recent addition to our portfolio is MRC Global, a distributor to oil & gas drillers, natural gas utilities, and other industries—think fittings, valves, pipes, and the like. MRC is an “ok” business—neither wonderful nor terrible, but simply boring and profitable. It is exposed to the ups and downs of the oil & gas market, but it has made strides to diversify its business into other, less cyclical markets. Most importantly, MRC has an unimpressive track record as a public company and some unhappy owners, and for those reasons I believe the company will be sold.

    MRC Global’s history stretches back to its founding in 1921, as McJunkin Supply Company. The company would enjoy several decades of prosperity, culminating in a large investment from Goldman Sachs in 2006. Following a series of mergers and acquisitions, Goldman renamed the company “MRC Global”, took it public in 2012, and then sold its remaining MRC shares the following year. This exit was well-timed, as MRC shares soon began a long decline, driven by a combination of inopportune investments and excess financial leverage. In 2015, urgently needing capital, the company turned to respected dealmaker Henry Cornell, a Goldman alum who was instrumental in MRC’s creation. Cornell Capital put up $363 million to buy convertible preferred stock and MRC used the fresh capital to pay down debt and restore its firepower for additional acquisitions.

    Cornell probably expected to earn a good cash yield for a few years, then convert the preferred shares and sell as MRC’s profits recovered and its valuation grew, but the rebound never really came. Following the investment, MRC’s operating income reached only around 1/3 of 2013 levels before another round of write-offs and losses in 2020 as COVID caused energy demand to plummet. Recent results have been better—the company has built a good line of business supplying gas utilities and industrials, and debt has been paid down substantially—but MRC has been a disappointment for Cornell Capital.

    Turning to the present, MRC has a term loan that comes due in September 2024. The company wants to refinance the loan, but Cornell Capital, which clearly wants out of this underwhelming investment, has blocked its efforts to date, filing a lawsuit claiming MRC must seek Cornell’s consent on the terms of the new debt. MRC expects to be able to pay off the term loan by drawing on its asset-backed line of credit, but this is a less than ideal solution. Enter activist Engine Capital, owner of 4% of MRC Global shares. Engine Capital has called for MRC Global to seek a sale, arguing it is the best way to cash out Cornell Capital and achieve a satisfactory result for all shareholders. In Engine’s view, MRC’s expressed strategy of continued mergers and acquisitions is unfeasible given the risks of ongoing litigation with Cornell Capital and MRC’s high cost of capital. I wholeheartedly agree. On October 30, Bloomberg reported that MRC Global is working with financial advisors to explore a sale. If MRC Global is sold, I believe it could fetch a price in the mid-to-high teens.

    To recap: MRC’s biggest capital provider is unhappy; an activist is unhappy; long-term shareholders likely are too, having lost half their investment since the IPO; and management can’t be having much fun either with the headache of litigation and the looming term loan maturity. Something has to give, and I believe it will be MRC Global’s existence as an independent public company.

    https://alluvialcapital.com/wp-content/uploads/2024/01/Alluvial-Capital-Management-Q4-2023-Letter-to-Partners.pdf

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