CASE STUDY: BROADWAY INDUSTRIES ACQUISITION OF LANDMARK

FACILITY SOLUTIONS
Deal Valuation and Synergy Analysis

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Broadway Industries, a facility services company based out of Newark, New Jersey is eyeing to acquire Landmark Facility Solution, a
large integrated player based out of Sacramento area offering its services to multiple commercial customers. The acquisition was pursued
with an expectation of growing market presence, improve growth and reward shareholders with better earnings prospects through
synergy benefits. This document discusses that why it was important for Broadway to acquire Landmark (synergy), was it possible for
synergies to materialize in real sense, should Broadway really acquire Landmark, what should be the fair valuation of Landmark, how
the acquisition should be financed (equity / debt / mix), what is the extent of equity dilution happen because of such acquisition and
what is the cost of such dilution.
 Why Broadway should acquire Landmark Facility Solution (Synergy)
o Integrated player with diversified offering
o Gain in market share
o Operational efficiency and cost optimization
o Ability to command premium pricing
o Opportunity to gain from Landmark’s expertise and developing a learning curve to improve existing operation of
Broadway and create new line of opportunities
 Will synergies materialize in real sense
 Discounting rate to be used for valuing the acquisition
 Choice of alternative to finance the deal and Broadway’s capability to service debt obligation
 Valuation of both standalone companies and combined firm post acquisition and fair value of Landmark
 Quantum of dilution for Broadway shareholder and cost of such dilution
 Annexure 1: Broadway Financial and Common Size
 Annexure 2: Landmark Financials and Common Size
 Annexure 3: Standalone Projection (Pre-acqusition)
 Annexure 4: Combined Financials (Post- Acquisition) – Optimistic Case
 Annexure 5: Combined Financials (Post- Acquisition) – Pessimistic Case
 Annexure 6: Debt Repayment and Interest Coverage under different options
 Annexure 7: Valuation
 Annexure 8: Comparable
Why Broadway should acquire Landmark Facility Solution (Synergy)
Broadway Industries (Broadway), based in Newark, New Jersey, founded in 1982, by Tim Harris, CEO and President, was a facility

services company and provides janitorial services, floor and carpet maintenance, HVAC and other building maintenance in the eastern

United States. It had 12 regional offices from New England to Florida, and served industrial, retail, manufacturing, government, and

education facilities. In year 2014, the company projected sales were US$ 161.9 million growing at a 4-Yr CAGR of 4%. The company

was earning a gross margins of ~8% and net margins of ~3%. Net profit in last five years had been in tight range of US$4.2 – 4.6 mn.

(Refer Annexure 1)

Facility management services industry was worth US$ 120 bn in the U.S. in 2013. Within this, the integrated facility-services

segment growth had been steady over last decade and the same was expected to growth at 6% p.a. till 2016. However, the market for

single-service contracts player like Broadway and others was forecasted to grow at 4% annually. Broadway growth was aligned to

industry growth and in absence of any new proposition the company growth was not expected to outpace industry in future as well.

Landmark Facility Solutions (Landmark), founded in 1956 as a regional janitorial services provider to commercial facilities in the

Sacramento area, grew quickly to become a large integrated provider to commercial customers. By early 2014, the company serviced

more than 300 mn sqft and had more than 20 regional offices, in Calfornia, Arizona, Oregon, Washington, and British Columbia. Its

major clients included large hospitals, and several Fortune 500 biotechnology and pharmaceutical companies. The company had won

several accolades and been named regional supplier of the year. Its services were highly respected and in western United States, it was

known for its high quality services and technical expertise and hence mostly command premium pricing. In last five years sales grew
between 4 to 5% and last 4-Yr CAGR was 4.5%. Year 2014 was expected to report sales of US$ 345.5 mn. While the gross margins had

been steady at little over 10%, jump in overhead cost led to fall in operating margins from 2.8% in 2010 to 0.9% in 2014 (E) and hence

net margins from 1.8% to 0.6%. Net profit fell from US$ 5.2 mn in 2010 to US$ 2.0 mn in 2014. (Refer Annexure 2)

It became important for Tim, to search for alternative and follow the path of M&A to look for inorganic growth opportunity and

became an integrated player in pursuit of business risk diversification, opportunity to tap newer geographies and improve growth

prospects. Hence the acquisition of Landmark will result in following synergy benefits to Broadway as a combined entity:

 Integrated player with diversified offering  Facility management service provider in the U.S. offer comprehensive line of

services including janitorial solutions, HVAC, commercial cleaning, facility engineering, energy solutions, landscaping, parking

and security. The industry is highly fragmented with few large integrated player and several small regional private players. The

environment offers opportunity for large integrated players that operate in multiple line of services and across geographies. Such

players diversify their service offering and often provide bundle / integrated offers. Large commercial players also prefer single

point of contact for all their requirement and hence prefer integrated players over standalone service providers. Advantage to

integrated players are that they leverage economies of scale and offer compelling value proposition to gain premium pricing.

Combination of Broadway and Landmark will create one such integrated service provider with bigger and diversified solutions,

larger footprints and customer base.