Shares of Louisiana-Pacific (LPX) jumped upward on Thursday following the news of the sizable purchase of Ainsworth, announced on Wednesday after the market close. The fair deal gives Louisiana-Pacific greater positive leverage to the continued upturn in the U.S. housing market recovery.
The Deal
Louisiana-Pacific announced that it has signed a definitive merger agreement under which the firm will acquire Ainsworth for a consideration of CAD $3.76 per share.
The proposed deal has a value of around $1.1 billion, including Ainsworth's modest net debt position. The price tag represents a 30% premium over Tuesday's closing price.
The deal has already been unanimously approved by the board of directors of Ainsworth. Funds tied to Brookfield Asset Management, which hold 54% of Ainsworth shares, have already voted in favor of the deal.
Shareholders in Ainsworth have a few options to tender their holdings. They can elect either for 0.235 shares in Lousiana-Pacific, CAD $1.94 in cash and 0.114 shares in Louisiana-Pacific, or CAD $3.75 in cash pro ration. In total Louisiana will offer CAD $467 million and 27.5 million shares for the company.
Ainsworth produces oriented strand boards focused on specialty products in North America and Asia. The company owns four production facilities in Canada, with a combined capacity of 2.5 billion square feet per annum. CEO Curt Stevens commented on the rationale behind the deal:
This is an excellent transaction that makes LP more valuable for our customers and our shareholders. Ainsworth has very high quality assets and provides us with an expanded suite of strand-based products and technologies, additional access to key international growth markets, particularly in Asia, and enhanced scale and efficiencies in North America.
The deal is expected to be accretive to both earnings as well as cash flows in the first year after closing.
To be completed, Louisiana-Pacific will require the approval of 66.67% of Ainsworth shareholders at a special meeting to be held in October of this year. Given the fact that Brookfield already tendered its holdings, this should not create major issues.
The deal is furthermore subject to normal closing conditions, including regulatory approval and the waiting period under the Hart-Scott-Rodino Antitrust Act. The deal is expected to close by the end of this year.
Valuation
Louisiana-Pacific ended its second quarter with $630.7 million in cash and equivalents. The company operates with $874.8 million in total debt, for a net debt position of almost $250 million.
The $1.1 billion price tag will be financed roughly half in cash. The remainder will be financed through new borrowings, as the firm has secured a commitment for a loan from Goldman Sachs (GS) and BMO Capital Markets.
Revenues for the first six months of the year came in at $1.11 billion, up almost 41% on the year before. Net income totaled $159.6 million, compared with a loss of $48.8 million last year. Earnings were inflated by a one-time benefit totaling $35.9 million, while last year's earnings were negatively impacted by $52.2 million debt extinguishment expenses.
Full-year revenue could easily top $2.2 billion, as earnings could approach $250 million.
Trading around $17 per share, Louisiana-Pacific is valued around $2.4 billion. This values operations at 1.1 times annual revenues and roughly 10 times annual earnings.
Louisiana-Pacifc does not pay a dividend at the moment.
Some Historical Perspective
Long-term investors are still seeing poor returns. Shares peaked around $28 in 2006 in the boom years ahead of the U.S. and global recession. As housing sales fell of a cliff, shares fell to lows of $2 in 2009.
After a solid recovery, shares have reached highs of $22 in March of this year. Trading around $15 per share, shareholders have seen year-to-date losses of 20%. Note that shares are still far removed from all-time highs around $44 in 1994.
Between 2009 and 2012, Louisiana-Pacific increased its annual revenues by a cumulative 62% to $1.72 billion. The continued momentum in 2013, could result in annual revenues being doubled within the four-year period.
After reporting large losses between 2009 and 2011, the company returned to profitability in 2012, and is expected to report a recent profit this year.
Investment Thesis
By acquiring Ainsworth, Louisiana-Pacific's shareholders see greater leverage to the U.S. housing recovery. U.S. housing starts are estimated to come in just below the 1 million mark for the year, and are expected to grow toward long-term averages of 1.5 million new starts per year.
The company will create a leading participant in the upturn, having sufficient capacity to meet expectations for future demand. Synergies in logistics and distribution processes should be attainable, thereby driving industry leading margins, while expanding access to Asian markets.
Pro-forma, the combination will generate annual sales of $2.5 billion, on which it expects to report income from operations of $300 million. The combination is expected to generate $575 million in adjusted EBITDA. The deal values Ainsworth at 5.7 times trailing EBITDA, in line with the company's own valuation. If for some reason the deal were to fall trough, Louisiana-Pacific stands to receive a CAD $32.5 million break-up fee.
The pro-forma comments about the company implies that Ainsworth will generate roughly $500 million in annual revenue on which it earns over $100 million. The $1.1 billion valuation values assets at 2.2 times annual revenue and 11 times annual earnings. While the company pays a premium in terms of revenue multiples, this is made up for by superior margins at the Canadian company.
Investors react upbeat to the deal, which seems to be executed at fair valuation levels. On top of that will come undoubtedly synergies, although these have not been confirmed, nor specified in the press release or presentation.
The transaction seems like a done deal. The 1,200 employees should be fine as the company is not planning layoffs, but instead wants to boost operations in the country. Louisiana-Pacific anticipates a further recovery of the housing market and a greater grip on supply. The fair deal with all kinds of strategic and financial benefits give shareholders in Louisiana-Pacific more upside potential as the housing market continues to recover.
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.
