Cardinal Infrastructure Group (Nasdaq: CDNL ), a Raleigh, North Carolina-based site development and heavy civil contractor, announced on Oct. 13 an agreement to acquire Florida central contractor Hughes Brothers Construction for $357.5 million.
The deal marks Cardinal’s fourth acquisition this year as it expands across the Southeast. The transaction could be up to $455 million through performance-based payments and is expected to close in the fourth quarter. Hughes Brothers contributes more than 500 employees, approximately $350 million in portfolio and more than $220 million in trailing 12-month revenue.
Based in Wildwood, Florida, Hughes Brothers specializes in underground utilities, earthmoving, grading, road construction and large-scale site development. The contractor owns a fleet of over 300 pieces of heavy equipment and operates around 25 full-time underground pipeline rigs.
Among its largest projects is Mass Grade 11A in Sumter County, Florida, where the contractor performed approximately 14 million cubic yards of earthmoving and built more than 10 miles of multi-lane highway as part of the development that included a new high school and surrounding infrastructure.
Cardinal CEO Jeremy Spivey told Wall Street analysts during an Oct. 13 earnings call that residential construction makes up the bulk of Hughes Brothers’ business, despite its commercial, industrial and municipal operations.
Stifel analyst Brian Brophy questioned the acquisition’s residential exposure, asking, “How has the backlog been trending here over the last year or so, given some of the softness we’ve seen in the Florida real estate market?”
Spivey said the contractor backlog has “increased substantially” and characterized the Central Florida real estate market as being at a different point in its construction cycle than other parts of the Southeast.
“Residential seems to have some good headwinds in that specific market,” he said. “Florida is a huge market, so if you go around Florida, everybody has something different to report.”
Building a platform Florida
Cardinal’s three previous acquisitions this year were AL Grading Contractors in Georgia, Piedmont Pipe Construction in North Carolina and Allied Paving Contractors, with the latter’s transaction closing on Oct. 1.
Hughes Brothers Construction performed 900,000 cubic yards of earthmoving, cleared 120 acres and installed 10,000 linear feet of offsite main force for the Ham Brown Reservation development in Central Florida. Click to enlarge.
Photo courtesy of Hughes Brothers Construction
“We acquired an already strong grading and site development business, then began adding services, increasing density and bringing in-house work that had previously been outsourced,” Spivey said of AL Grading Contractors.
He said Cardinal sees similar opportunities to Hughes Brothers, such as adding construction services, doing more work for existing clients and pursuing smaller acquisitions around the Florida operation.
Hughes Brothers has grown entirely through its existing operations without making acquisitions, executives said. Co-founders Chad and Justin Hughes will remain president and vice president, respectively, after the transaction closes.
Cardinal plans to finance the initial purchase with about $156 million in new debt, existing cash and Class A common stock, with at least 40% of the consideration in Cardinal stock.
The deal follows a second quarter in which Cardinal’s adjusted EBITDA margin fell to 12.4%, down from 18.6% a year earlier. The company subsequently projected a full-year adjusted EBITDA margin of 16% to 18%.
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Hughes Brothers’ adjusted EBITDA margin exceeded its current guidance range, said Cardinal CFO Mike Rowe, who attributed the stronger profitability in part to the contractor’s self-executing operations and long-standing customer relationships. It has “an experienced workforce and [owns its] own team,” he said.
Spivey said Cardinal plans to integrate additional services into Hughes Brothers’ operations before continuing geographic expansion throughout Florida.
