Glatfelter - Good Acqusition Of Dresden Papier Sends Shares To Fresh Highs

| About: Glatfelter (GLT)

Shares of P.H. Glatfelter Company (NYSE:GLT) rose 7% in Wednesday's trading session. The manufacturer of specialty papers and fiber-based engineered materials announced the acquisition of Dresden Papier.

The Deal

P.H. Glatfelter announced that it has agreed to acquire Dresden Papier GmbH from Fortress Paper. The company will pay approximately $209 million, or 160 million euro for the German supplier of nonwoven wallpaper base materials.

Superior characteristics of nonwoven wallpapers include dry strip-ability, a higher tear resistance and no material expansion or shrinkage when getting wet. As a result demand for Dresden Papier's nonwoven products is increasing in both Europe and Asia. The company owns a 60,000 ton manufacturing facility, which employs 146 workers.

Despite the ongoing difficult circumstances in Europe, Glatfelter expects that the global nonwoven business will show compounded annual growth rates of at least 10% in the foreseeable future.

CEO and Chairman Dante C. Parrini commented on the deal, "Glatfelter's agreement to acquire Dresden Papier demonstrates our commitment to building leading position in niche global growth markets for specialty papers and fiber-based engineered materials. Dresden Papier has built a preeminent position in nonwoven wallpaper materials - as both the cost and the quality leader because of its innovative products, proprietary manufacturing techniques, and long-standing customer relationships."

Dresden Papier generated full-year revenues of $151 million for 2012, or 117 million euro. As such, the deal values the firm at 1.4 times annual revenues. The company reported EBITDA of $38 million, or 30 million euro for the year, valuing the firm at 5.5 times annual EBITDA. As a result of the deal, Glatfelter expects to report earnings accretion of $0.25 per share, following the closure of the deal.

The company anticipates to close the deal during the second quarter of 2013. The deal will be subject to normal closing conditions including regulatory approval of local authorities in Germany.


Glatfelter ended its fiscal year of 2012 with $97.9 million in cash and equivalents and $250 million in long-term debt, for a net debt position of $152.1 million. Glatfelter will finance the acquisition with cash at hand and an existing $345 million credit facility.

The company generated full-year revenues of $1.58 billion for the year of 2012, down slightly compared to 2011. Net income came in at $59.4 million, or $1.36 per diluted share.

Factoring in Wednesday's 7% jump, the market values Glatfelter around $877 million. This values the firm around 0.55 times annual revenues and 14-15 times annual earnings.

Glatfelter currently pays a quarterly dividend of $0.10 per share, for an annual dividend yield of 2.0%.

Some Historical Perspective

Shares of Glatfelter have traded between $10 and $20 for most of the past decade, with exception of a temporary spike towards $5 during the recession of 2009. Wednesday's announcement sent shares above $20 per share. The last time that shares have seen these levels was back in 1997. Shares are still far removed from all-time highs set around $30 back in 1991.

As such the company's track record in creating long-term value has not been the greatest. Between 2008 and 2012, the company managed to expand annual revenues by a third from $1.2 billion towards $1.6 billion. The company has been profitable in recent years, but 2012's earnings of $59.4 million were only half 2008's annual earnings of $123.4 million.

Investment Thesis

Shareholders of Glatfelter applaud the acquisition of Dresden Papier, given the modest valuation multiples and the significant earnings accretion. The deal will add roughly 10% in annual revenues, resulting in pro-forma revenues of $1.75 billion.

The valuation multiple at 1.4 times annual revenues results in a steep premium compared to Glatfelter's own valuation of 0.55 times revenues. Yet Dresden Papier company is much more profitable. The accretion of $0.25 per share, suggests net earnings will increase by some $11 million, after the additional financing costs incurred over the deal value.

Pro forma, the combination will be valued at around 0.5 times annual revenues and roughly 12-13 times annual earnings, while boosting the growth profile of the firm. As such Wednesday's reaction is understandable as investors send shares some 7% higher, or $1.35 per share. This increases the value of shares by roughly 5.5 times the expected annual earnings accretion.

Overall the deal looks very attractive in terms of stand alone valuation, earnings accretion and diversification. The deal will furthermore boost the growth profile of the overall firm.

At the same time, shares have already risen some 27% over the past year alone. While the overall valuation looks appealing at 12-13 times pro-forma earnings, I might stay on the sidelines given the structural cyclical nature of the business. The fact that Glatfelter operates as a small capitalization stock in a little desired industry does not help either.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.