January 16, 2015 - 10:35pm EST by
2015 2016
Price: 9.86 EPS 0 0
Shares Out. (in M): 27 P/E 0 0
Market Cap (in $M): 278 P/FCF 10.5 8.7
Net Debt (in $M): 222 EBIT 59 67
TEV ($): 500 TEV/EBIT 8.6 7.5

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  • Special Purpose Acquisition Company (SPAC)
  • Automobiles
  • Potential Dilution


Hennessy Capital Acquisition Corp. (“HCAC”)


Investment Thesis

A SPAC* is a vehicle created for a sponsor to acquire a sizable equity stake in a company for minimal cost, at least that is how I have always viewed them. With that in mind, I am recommending a purchase of HCAC, a SPAC set to acquire Blue Bird Corporation. The reason is twofold – 1) Today’s share price creates Blue Bird for 8.6x EBIT and 10.5x FCF (2015E) and 2) I met with Blue Bird’s CEO Phil Horlock and I was very impressed with his passion for the business and margin/cost focus. I believe the shares will trade closer to $14.00 in a year, compared to today’s $9.86 price.


*Special Purpose Acquisition Company.



HCAC was created by Daniel Hennessy, a former middle-market private equity executive. After studying over 125 potential acquisition candidates, HCAC chose Blue Bird as the most attractive business to inject into HCAC. Upon completion of the acquisition, the entity will be renamed Blue Bird.


The transaction value represents 7.0x and 6.4x 2014E and 2015E EBITDA* (midpoint of guidance). As discussed below, the seller (i.e. Cerberus) will roll a portion of its equity into the new entity. Cerberus purchased the company in 2006 and is likely eager to further monetize the position after last year’s dividend deal.


*Sponsor dilution is the reason why the shares creation multiple is higher.


Blue Bird is a manufacturer of school buses, with approximately 180,000 in operation today and current market share of 30%-31%. The company produces mostly Type C buses, which seat 36-78 riders and use diesel or propane and larger Type D buses, which seat 66-84 riders and use diesel or CNG engines. The workforce is non-unionized and its buses and aftermarket parts are sold through exclusive dealers*.


*Average dealer has worked with Blue Bird for ~24 years.


Sales by customer are split between school districts (67%), contractors (21%), government contracts (5%), national fleets (5%) and exports (2%). The business is an oligopoly. Principal competitors are Thomas Bus (Daimler) and IC Bus (Navistar), but only Blue Bird is non-unionized. Relationships, brand recognition and safety concerns make this market difficult to penetrate.


New management started in 2010 and the results have been impressive. Market share improved 700-800 bps, warranty claims declined significantly and the breakeven (EBITDA) bus volume/month is now 315 compared to 400 in 2010.


The improved performance is partially tied to new differentiating features and product initiatives, such as alternative fuel-powered bus sales. Blue Bird’s propane bus operates at a lower cost than diesel units, and until recently, the company’s offering was the only one on the market. On the cost side, management consolidated assembly operations, reduced bus architectures and entered into long term supply agreements covering 85% of purchases.


Transaction Funding

The transaction funding consists of $115 million of HCAC cash, a $40 million convertible preferred (already subscribed by Osterweis), rollover debt of $235 million and the reinvestment of seller equity of $115 million. This funding is subject to change as existing HCAC investors may elect for redemption* in lieu of participating in the Blue Bird transaction.


*A unique feature of SPACs. Based on the $115 million cash balance and shares outstanding of 11.5 million, the redemption price is $10/share.

 Today’s trading price implies at least some investors will elect the redemption option.


Additional funds are available as the convertible preferred may be upsized by $10 million, a backstop commitment of $10 million (in shares) has been provided (from Overland Advisors) and another source is a larger reinvestment of the existing seller’s equity. However, if redemptions result in the cash component paid to Cerberus to be less than $100 million, then Cerberus may terminate the purchase agreement.



The transaction is expected to close around February 9th, after the shareholders’ meeting. Approval of the business combination requires a majority vote of shareholders present or voting by proxy. Hennessy Capital owns ~20% of the outstanding shares and pledged to vote in favor of the deal.


If the business consummation (or a separate deal) is not completed by October 23, 2015*, then the cash must be returned to HCAC public shareholders.


*Automatic three month extension if LOI is executed.



Assuming no redemptions, HCAC shareholders, including the sponsors, will own ~58% of the pro forma shares. The remaining 42% of the shares will be held by Cerberus. Any redemptions of HCAC shares will increase the Cerberus stake and possibly result in shares being issued to the backstop investor if cash balances in the trust fall below $65 million.


Existing HCAC Shareholders      11.5000
Founder Shares* 2.8750
Warrant Exchange** 0.5750
Founder Warrant Exchange 0.6375
Cerberus 11.5000

*The sponsor and independent directors paid $6.1 million for the founder shares and placement warrants.

  718,750 founder shares are subject to forfeiture if the stock price is not >$13.00 on by the 4th year of the acquisition’s closing.

**Concurrently with the purchase agreement, HCAC intends to exchange up to 12,125,000 warrants for 0.1 shares.

   Remaining 5yr warrants (11.5 million) entitle holder to purchase ½ share @ 5.75 (i.e. 1 share @ $11.50).


Capital Structure  
Revolver ($60 MM) $0
Term Loan (6.5%) $235
Capital Leases $0
Convertible Preferred Stock*     $40
Total Debt + Preferred $275
Cash ($53)
Net Debt + Preferred $222
Equity Market Cap** $278
Enterprise Value*** $500

*Convertible @ $11.75/share. Dividend rate is 7.625%.

** Includes warrants.

***Excludes pension liability of $41 MM (plan frozen since 2006).


Once public, I expect Blue Bird will refinance the term loan at a lower rate. That is not factored into my analysis.


Industry Data 2011 2012 2013 2014
US + CAD Bus Units    23,822    24,810    26,722    26,680 (mid)
Blue Bird Volumes 6,525 6,882 8,654 9,604
Market Share 26% 27% 30% 30%-31%


From 1985 to 2014, industry sales averaged 30,550 units. Peaks occurred in 2001 (37,641) and 2007 (34,882) compared to a trough in 2011 (23,822) as property tax receipts declined. Based on registration data, population growth and bus retirements (current age of fleet is 12 years), management believes 2016 production will approach historical averages. Furthermore, housing price appreciation is expected to result in additional property tax receipts, another tailwind.


Financials 2011 2012 2013 2014 2015
Revenue     $566    $598    $777    $856    $929   
EBITDA* $14 $17 $50 $67 $74
EBIT** $9 $13 $45 $61 $64
FCF         $26

*EBITDA excludes public company costs and stock compensation.

 To account for these costs, I subtract $2 million for public company costs and $3 million for stock compensation.

**Unlevered FCF (capex < depreciation).


The drivers of profitability from 2012 to 2013 include cost reductions ($21 million) and volume/mix improvements ($29 million). I believe these are sustainable as industry volumes should continue to grow and management remains focused on costs and margin improvement.Using today's cost structure and market share, 2011 EBITDA would have been $45 million.


The guidance for 2015 appears conservative. Blue Bird should benefit from lower steel, aluminum and copper costs, while recent drops in oil and NGLs bode well continued propane switching and budgets as fuel costs comprise the largest portion of school transportation costs.


For 2016, revenue and EBITDA is projected to hit $980 and $82 million, respectively. The long term objective is to drive EBITDA margins to 10% of sales. Drivers include the expansion of propane buses, which carry gross margins that are 50% higher than diesel buses and a robust replacement cycle. As mentioned earlier, the average fleet age is 12 years (vs 9 in 2009), which compares to a lifespan of 12-15 years. This should lead to some pent up demand. Regarding expansions, capital expenditures should remain low as no significant new capacity is required to support near-term growth.



At current prices, the stock trades at 7.3x EBITDA, 8.6x EBIT and 10.5x FCF using 2015 numbers. While I believe Blue Bird is cheap on an absolute basis, these multiples still compare favorably to industry averages in the 9x EBITDA range.


Blue Bird is an iconic brand in an industry that is still in the process of reverting to the mean and with an existing equity sponsor retaining a substantial interest. I believe a year from now as the market rolls forward 2016 numbers, the shares will trade at 13x FCF, or ~$14/share on a fully-diluted basis. Current trading liquidity implies this is more of a PA position, but I believe this will improve once the transaction is completed.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


-Completion of asset acquisition

-Achieving guidance

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