Spring is here and the wedding season has started in Georgia. Two industrial speciality material companies based in Alpharetta, Georgia, a suburb of Atlanta, have decided to take advantage of the good weather to tie the knot.
Schweitzer-Mauduit International Inc. (SWM, Financial) and Neenah Inc. (NP, Financial) recently announced that they would pursue a "merger of equals." According to the terms of the deal, Neenah shareholders are to receive 1.358 shares of Schweitzer-Mauduit for each Neenah share with a pro forma ownership split of the combined company at 58% Schweitzer-Mauduit / 42% Neenah.
Both companies have legacy paper product backgrounds and in recent years have being using the cash flows from legacy lines to diversify into various speciality products. It is interesting that both companies were spun out of former parent Kimberly-Clark (KMB), Schweitzer-Mauduit in 1995 and Neenah in 2004, as low-growth businesses.
Below is a chart detailing some basic information on these stocks:
Ticker | Company | Current Price ($) | Market Cap ($Millions) | Enterprise Value ($Millions) | Revenue ($Millions) | Long-Term Debt ($Millions) | Cash Flow from Operations ($Millions) | Free Cash Flow ($Millions) | EV-to-Ebitda | PE Ratio | PB Ratio | PS Ratio | Price-to-Operating-Cash-Flow | Price-to-Free-Cash-Flow |
Neenah | 41.67 | 699.54 | 1,159 | 1,028.50 | 434 | 53.20 | 25 | 37.44 | At Loss | 2.20 | 0.67 | 13.21 | 28.11 | |
Schweitzer-Mauduit | 27.77 | 880.56 | 2,085 | 1,440 | 1,267 | 58.10 | 19.20 | 9.79 | 9.92 | 1.27 | 0.60 | 15.03 | 45.45 |
The companies describe the merger as a strategic combination which should create a $3 billion global leader in specialty materials with defensible positions in attractive, growing categories, a strong industrial logic with complementary customers, technologies and products. They cite an enhanced ability to accelerate revenue growth and innovate, and they aim to unlock $65+ million of cost synergies for meaningful value creation.
Both company have middling GF Scores and look undervalued on a GF Value basis.
Schweitzer-Mauduit |
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Neenah Inc. |
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Following are the stock price charts of both companies over the last 20 years:
Both companies are strong dividend payers, with Neemah paying a yield of 4.52% and Schweitzer-Mauduit paying a yield of 6.35%, so it is expected that the combined company will continue to pay out a good dividend.
Source: Merger announcement
The following are the key product lines of the combined company. The number of lines are quite diverse.
Source: Merger announcement
Conclusion
The merger makes sense from a strategic point of view as both companies have declining legacy paper product operations and have growth areas in other speciality material science products lines. The merger brings needed scale to both in manufacturing and improves the global geographical footprint. The good thing is that no additional debt is involved in this deal, though it can be debated if the price is fair for both sets of shareholders.
With a combined enterprise value of $3.25 billion and indicated combined Ebitda of $450 million, the future combined company appears to be trading at an attractive enterprise-value-to-Ebitda ratio of 7.22. As a comparison, 3M (MMM, Financial), the big kahuna of the material products world, trades at an enterprise-value-to-Ebitda ratio of 10.26. While business conditions in the material sector are tied to GDP, it should be noted that the stocks of both companies are down substantially from the highs. So, while the market is fearing a recession, a recession looks already priced in.