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Investors in Taminco (NYSE:TAM) are cautiously optimistic about the deal which the company announced over the past trading week.

The company made a nice deal acquiring the acid business of Kemira Oyj at favorable multiples. While I like the deal, the leverage and lack of GAAP earnings, combined with no dividends make it easy for me to stay on the sidelines.

The Deal

Taminco announced that it has entered into a definitive agreement to acquire the acid business of Kemira Oyj for $190 million.

The acid business serves end markets which are benefiting from the so-called global "megatrends" including animal nutrition, water treatment and energy. The firm holds a manufacturing facility for formic acid and derivatives in Finland and employs 160 staff worldwide.

The entry into the formic acid market complements the strategy of investing in niche business with a strong outlook and levels of similarity with Taminco's core operations. Formic acid is used for the preservation of animal feed and de-icing of airport runways, among others.

CEO Laurent Lenoir commented on the rationale behind the deal, "As a leading specialty chemical producer, Taminco is excited to advance its long term, ongoing strategy of expansion into key markets through the addition of high quality, niche businesses. Our entry into the formic acid space is an opportunity to leverage our existing skill-set to expand into attractive new product lines, as well as achieve numerous synergies that will continue to optimize value for all of our stakeholders."

The acquired activities generate annual EBITDA of roughly $32 million on revenues of around $140 million.

The deal has been approved by the board of directors of both companies and is expected to close in the first quarter of 2014. The deal is subject to normal closing conditions.

Valuation

Back in November, Taminco released its third quarter results for 2013. The company ended the quarter with $45 million in cash and equivalents. Total debt stands at $912 million, for a rather high net debt position of $867 million.

On December 11, Taminco's shareholders offered 10 million shares for $20 apiece, thereby raising $200 million in gross proceeds. Note that the company did not receive any proceeds from this offering.

Revenues for the first nine months of the year came in at $917 million, up 29% on the year before. Earnings totaled merely $1 million, compared to a $29 million loss reported in the comparable period a year earlier. At this pace, annual revenues are seen around $1.2 billion.

Trading around $20 per share, the market values Taminco at $1.3 billion. This values equity in the firm at 1.1 times annual revenues, while earnings are negligible for the year.

The company does not pay a dividend at the moment.

Some Historical Perspective

Shares of Taminco were sold to the general public as recent as April of this year. At the time, shares were offered at $15 per share and shares steadily rose to highs of $23 in August of this year. Ever since, shares have seen a very modest pullback to current levels at $20 per share.

Between 2009 and 2013, Taminco is expected to significantly grow its annual revenues. Revenues are seen around $1.2 billion this year, up a cumulative 45%. The company posted modest earnings in recent years, followed by a loss of $28 million last year.

Investment Thesis

Taminco is a specialized player, supplying long-term growth markets including homecare, agriculture, animal nutrition, energy and water treatment.

In terms of product sales, the functional amines is the biggest business with 73k ton production in the third quarter. Third quarter sales of the product were $133 million, roughly 45% of total revenues. The specialty amines business produced 57k tons during the quarter, with sales of $132 million, making up a similar 45% of total revenues. Crop protection revenues of $37 million make up little over 10% of the total sales.

At this rate, annual EBITDA is seen around $260 million for Taminco. Including the company's debt position, the enterprise of Taminco is valued at nearly $2.2 billion. This values the operations at 1.8 times annual revenues and 8.5 times EBITDA.

In this light, the $190 million acquisition which will boost sales by 12% seems quite favorable. The deal values operations at 1.4 times annual revenues and 5.9 times EBITDA, which seems quite favorable.

While these multiples seem fair, and long-term growth is solid, Taminco is failing to report GAAP earnings. This combined with a lack of dividend and the leveraged position with over a billion in debt, makes me a bit hesitant. At this point, Taminco already spends almost $90 million on annual interest payments, while the deal would push this annual bill well beyond a $100 million per annum. The net debt position of $1.1 billion is therefore very significant, given the lack of operating earnings of the business at the moment.

While I applaud the deal, there is more work ahead to convince me taking a stake in the business. I remain on the sidelines awaiting better sustainable profitability and lower leverage, before getting interested in this long-term player.

Source: Taminco - Strategic Addition Into The Acid Business, Yet Leverage Is A Concern