STABLEBOY SELECTIONS

U P D A T E

On February 2, 2009, Meadow Valley completed its going private transaction at $11.25 per share. The approximate return to arbitrageurs is 65%, or 520% per annum.

http://finance.yahoo.com/news/Meadow-Valley-Completes-bw-14229823.html

T H E S I S

Meadow Valley’s construction services segment builds bridges, overpasses, channels, roadways and airport runways; the construction materials segment manufactures ready-mix concrete, sand and gravel products. In a 10-Q filed November 14, Meadow Valley comments on the status of its operations:

“As with each quarter this year, the third quarter was significantly buoyed up by the performance of our construction services segment. Entering fiscal 2008 with approximately $172.4 million in backlog provided a good deal of momentum for the construction services segment. Contract backlog as of the end of the third quarter was approximately $145.1 million, 63.4% more than a year ago, and should continue to provide near-term opportunity for solid performance from the construction services segment. The construction services segment is primarily engaged in public infrastructure construction and, so far, the public works sector of the construction industry has been less affected by the turmoil in our nation’s economy. As a result, we have had ample bidding opportunities, but what is apparent from the bidding is that competition is intensifying both in terms of the number of bidders as well as tightening profit margins. Our current bonding limits of approximately $250 million total bonding program and a single project limit of approximately $100 million allow us to bid on larger projects which typically see fewer bidders because of such high bonding requirements. Nonetheless, in today’s competitive environment we see an increased number of bidders on jobs of all sizes.

“The sharp decline of the housing sector has been the primary cause of the recent poor performance of our construction materials segment. Since demand for our product, ready-mix concrete, depends entirely on the amount and location of construction activity and because most of our facilities are located to best serve the residential or residential-related commercial construction projects, we have been dramatically affected by this downturn. A few quarters ago, what seemed to start as a slowdown in housing has now erupted into a full-blown global financial crisis. It appears highly likely that we will experience a much more pronounced and longer downturn than previously believed. Furthermore, commercial construction typically lags residential construction and we have only begun to see the slowdown in commercial construction activity. Accordingly, we have taken specific actions to reduce costs and preserve cash for our construction materials segment. These actions include, but are not limited to: (i) not filling the vacancy created by the promotion of our Vice President to President of RMI upon our President’s retirement, (ii) reducing construction materials segment administrative personnel, (iii) implementing a fuel surcharge, and (iv) reducing operational overtime for the construction materials segment. Subsequent to the third quarter ended September 30, 2008 we also imposed a 5% reduction in pay for all construction materials segment salaried employees. We will continue to analyze our operations for other opportunities to further reduce costs and preserve cash.”

Since service contracts account for the great majority of Meadow Valley’s revenue, the company should maintain a moderate level of earning power through the current recession. Indeed, third quarter performance has been satisfactory even after the exclusion of a particular non-recurring benefit. There are, however, two important risk factors for the construction services segment:

“Because much of the funding of transportation infrastructure comes from local sales and fuel taxes, any event that may impact the overall economy that would decrease consumer spending or diminish fuel consumption would result in lower receipts of tax dollars that, in turn, would diminish the availability of funding for transportation infrastructure.

“As public works constitute the majority of our CSS volume, and governmental entities are the primary source of funding for infrastructure work, it is, therefore, important that public funding be maintained. The national transportation legislation, SAFETEA-LU, was signed by President Bush on August 10, 2005 and should provide relatively stable funding for transportation infrastructure at least until its expiration in the fall of 2009.”

Government construction expenditures should increase under the Obama administration.

In July 2008, Insight Equity proposed to acquire Meadow Valley for $11.25 per share. Given the significant premium to current prices, I believe that stockholder approval is assured. However, Insight Equity now claims Meadow Valley may have experienced a material adverse effect, viz., fair market value has declined by more than $6 million. Fair market value is not clearly defined in the merger agreement, but the main issue appears to be poor operating results at Meadow Valley’s Ready-Mix subsidiary. According to management, Ready-Mix has not violated deal covenants.

There are three obvious outcomes to the Meadow Valley situation: first, stockholders can receive $11.25 per share; second, they may receive some reduced price; and third the merger may be terminated. I believe that each outcome is equally probable, and that even a termination will not be too onerous for stockholders. The mathematical expectation is positive.