Calgon Carbon (CCC) is making a big expansionary move into Europe with the purchase of carbon and filter aid assets. Investors like the proposed deal, as it allows Calgon to effectively use its strong balance sheet, while the anticipated synergies look sizable as well.
As the deal makes both sense from a strategic and financial point of view, investors have been quite aggressive to price in the benefits of the deal. Shares of the company jumped by 10% in response to the nearly 20% jump in revenues, resulting from the deal. After the aggressive move higher, I fail to see immediate upside for the shares, as I still like the long term prospects.
Expanding Into Europe
Calgon Carbon is spending $160 million in order to acquire the European wood-based activated carbon and filter aid business of CECA. The deal is comprised out of a $152 million cash portion, accompanied by a modest assumption of certain liabilities.
The deal involves the purchase of 6 facilities which are located in France and Italy, providing work to 300 workers. The deal will increase Calgon´s exposure to Europe, boosting the revenue share of that continent by ten points to 35% of overall sales.
Calgon Carbon will furthermore benefit from improved diversification in terms of exposure to certain end-markets. The acquired activities furthermore appear to be quite ¨defensive¨, as nearly half of sales are generated from the food and beverage industry.
What About The Financial Benefits?
The activities which Calgon is looking to acquire generated sales of $103 million in 2015, with EBITDA coming just below $17 million. Based on the $160 million purchase price, this translates into a sales multiple of 1.5 times, while the EBITDA multiple comes in at 9.6 times.
With shares of Calgon trading just shy of $14 ahead of the deal, the equity valuation came in at roughly $715 million. If you include the net debt load of roughly $100 million, the enterprise valuation comes in at around $820 million. This translates into a similar 1.5 times sales multiple based on 2015 revenues of $535 million. Based on Calgon´s EBITDA, which just trailed $100 million, the multiple is 8.2 times.
While sales multiples being paid are similar, Calgon is paying a slight premium for the acquired businesses in terms of EBITDA multiples. This follows the fact that its own margins of 18.6% are 230 basis points higher than those of the acquired businesses.
This seems to indicate that Calgon is paying fair multiples in order to expand the business. The company does stand to benefit from the deal in a number of ways. The deal allows Calgon to effectively use its strong balance sheet, while the diversification profile improves dramatically as well.
The real benefit has to come from synergies between the acquired activities and the existing assets in Europe, while Calgon sees room for improved performance of the acquired businesses as well. Cost synergies could total $3.4 million by 2019, accompanied by $3.3 million in improved efficiencies of current business practices. This should boost EBITDA to more than $23 million in a few years down the road, reducing the EBITDA multiple to a little less than 7 times.
The New Combination
The new combination will grow EBITDA by roughly 16% to $116 million as synergies could provide a further boost to this number in the years to come. This means that leverage ratios are expected to double towards 2.2 times EBITDA, a still very manageable debt load. That said, the company indicates that it is halting share repurchases for now, allowing the company to deleverage in a quicker way.
Calgon Carbon reported operating profits of $65 million in 2015, as net earnings totaled $43 million on the bottom line. Given the $17 million EBITDA contribution from the acquired business, operating profits could increase by roughly $11 million. Assuming a 4% cost of interest, interest expenses increase by $6 million, thereby boosting after-tax earnings by some $3-4 million in year one. This after-tax profit contribution will increase towards $7-8 million if the targeted synergies are achieved, potentially adding roughly $0.15 to the earnings per share.
This means that it becomes increasingly easier to post earnings of roughly $1 per share going forwards, certainly if end markets stabilize and start growing again. That means that shares now trade hands at 15 times forward looking earnings, after shares of Calgon jumped 10% in response to the deal.
As referred to in the previous sentence, investors have aggressively priced in the benefits of the deal. The $160 million deal has real benefits in terms of diversification and synergies. This has been reflected into a 10% jump in the share price, equivalent to a nearly $70 million jump in the valuation of the shares of Calgon Carbon. This value increase amounts to roughly 10 times the projected pre-tax synergies.
This means that investors appear to be quite aggressive to price in the benefits, as the overall valuation is still reasonable. Shares now trade at roughly 15 times pro-forma earnings, while leverage is still very manageable. While I still see a bit more upside towards the $18-20 region if end markets start growing again, something which could allow for valuation multiple inflation, I would not rush in to buy the shares following this deal.
Disclosure: I/we 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.