On September 6th I posed an article on Boise Inc. (BZ). In the article I discuss the implications of International Paper’s acquisition of Temple Inland on Boise’s valuation. I argued that based on the value International Paper (IP) was ascribing to Temple Inland (over 10x trailing EBITDA) at only $5.80 per share Boise was grossly undervalued.
Since then Boise has only gotten cheaper. On October 3rd the Russell 2000 index started the fourth quarter by dropping 5.4%. Boise sold off 8.9% to $4.71 per share. Boise’s market cap now stands at $572mm. Its enterprise value is $1.1 billion.
After the market closed October 3rd it was announced that Boise was acquiring the Hexacomb protective packaging business of Pregis Corporation for $125mm in cash. According to the press release Hexacomb:
“is a leader in kraft paper-based honeycomb protective packaging products and employs approximately 440 employees at 12 manufacturing facilities across six countries. In 2010, Hexacomb had revenues of $102 million and converted approximately 60,000 tons of containerboard”
The press release provides some historical financial results as well. For the 12 months ended August 31, 2011 Hexacomb generated $109.8mm in sales and $13.2mm in EBITDA. With the benefit of a renegotiated paper supply agreement and estimated synergies of $5.2mm the incremental EBITDA for Boise is $19.8mm. This implies a purchase multiple of 6.3x of synergized EBITDA (recall that International Paper’s deal valued Temple-Inland at over 10x trailing EBITDA).
On a trailing basis Boise is currently trading at only 3.0x EBITDA, a ridiculously cheap multiple. Even at their 2009 “recession” EBITDA of $251mm they would be valued at only 4.4x. However, since 2009 they have acquired Tharco and now Hexacomb, increasing their higher margin packaging business. The Tharco deal, announced in February, was a $200mm all-cash transaction valued at 5.7x trailing EBITDA assuming $8mm in annualized run-rate synergies.
Taking “trough” EBITDA of $250mm, adding in $27mm from the Tharco deal (excluding the $8mm in synergies), and $14.6mm from Hexacomb (excluding the $5.2mm in synergies) results in EBITDA of $291.6mm, only 4.2x Boise’s current enterprise value after taking into account the $125mm in cash paid for Hexacomb. With synergies added in the multiple falls to 4.0x.
Further, Boise just finished a $75mm share repurchase and announced a second $75mm repurchase program. If there were to fully execute this second program (note that they first program was completed in a month) they will have repurchased 26% of the company based on the current market capitalization.
Why is Boise trading at such a low valuation?
Although a small cap company, Boise has large hedge fund shareholders with significant positions that would pressure the stock if they decided (or were forced to) liquidate the position. In fact, in August Janus Capital filed a 13G after they sold a significant part of their position thereby lowering their ownership under 5%. It is also worth noting that as of June 30 given Janus Capital’s sale of stock Paulson & Co. was the largest shareholder at 6.6%.
Eventually Mr. Market will stop whipsawing Boise’s valuation around and the stock will begin to migrate back towards its fundamental value. If it doesn’t, it could become an acquisition target. With 2010 free cash flow generation of $178mm (30% of its current market cap) and a management team focused on returning capital (in addition to the share buybacks referenced above, Boise has paid 2 special dividends since November 2010). Boise is positioned to provide an above-market return to patient investors.
Disclosure: I am long BZ.