EX-99 2 walterindustriesinc.txt WALTER INDUSTRIES, INC -VALUE-CREATION DISCUSSION Walter Industries Inc. Value-Creation Discussion October 17, 2005 Private and Confidential: For Discussion Purposes Only RECENT DEVELOPMENTS o Acquisition of Mueller Water Products ("Mueller") creates the industry leader within the water infrastructure space - Substantial cost synergies and cross-bundling within water infrastructure subsidiary - Significant market opportunity to be had in the rebuilding of the Gulf Coast due to Hurricane Katrina o Met Coal Prices continue to be strong, setting the stage for robust cash flows out of Jim Walter Resources ("JWR") in 2006 - Natural gas prices have climbed dramatically and JWR should see improved cash flows in 2006 from its Black Warrior Methane operating unit o Turnaround within Jim Walter Homes ("JWH") will prove more challenging due to price increases in lumber, building materials and a tighter labor market in the Gulf Coast 1 Private and Confidential: For Discussion Purposes Only SITUATIONAL OVERVIEW o Walter Industries ("Walter") continues to trade at a material discount to its intrinsic value - Walter's conglomerate structure obfuscates true value - Coal investor vs. water infrastructure investor - Walter is not covered by bulge-bracket investment banks - Financing subsidiary complicates balance sheet - Homebuilding subsidiary's underperformance necessitates significant senior level management attention o Coal companies have appreciated substantially over the last two years - Coal comparables are currently trading between 5.8x - 8.0x 2006E EBITDA o Water-infrastructure companies trade at multiples in the 8.5x - 10.5x 2006EBITDA range o Mortgage Finance & Homebuilding companies have traded off significantly over the last couple of weeks on interest rate concerns 2 Private and Confidential: For Discussion Purposes Only PIRATE CAPITAL PROPOSAL o Immediately initiate the sale of the Finance & Homebuilding subsidiaries - Streamlines corporate structure - Simplifies the balance sheet - Allows senior management to focus on the water and coal subsidiaries - Use proceeds to pay down Term Loan B at Walter Industries o Form special committee to immediately consider strategic alternatives for JWR - Take advantage of robust coal valuations - Analyze sell vs. build scenarios o Announce the intention to pursue an IPO of 20% of Mueller (target IPO date - early second quarter of 2006) with a subsequent spin-off to shareholders - Take advantage of robust water valuations - Allows adequate time to integrate Mueller & U.S. Pipe - Create appropriate capitalization for Mueller by using IPO proceeds to tender for 14.75% Senior Discount Holdco. Notes - Decrease interest expense - Create valuable acquisition currency 3 Private and Confidential: For Discussion Purposes Only PIRATE CAPITAL TIMETABLE o Pirate Capital has set an October 31st deadline for Walter's Board of Directors (the "Board") to publicly announce their intention to immediately implement our proposed initiatives o Should Pirate Capital's proposal not be met, we intend to immediately initiate a consent solicitation to remove a majority of the existing directors and replace them with directors focused on maximizing value for all shareholders - Pirate Capital's slate of directors would include representatives from both Pirate Capital, as well as individuals with significant backgrounds in the coal and/or general industrials industries o Pirate Capital has held extensive discussions with potential financial advisors in regards to various value-creating scenarios o Pirate Capital continues to support Chairman & CEO Gregory Hyland and management, but strongly feels that the proposed initiatives would be a significant step towards unlocking shareholder value 4