Worthington Industries: Acquisition Of Palmer Tank Creates Value For Shareholders

| About: Worthington Industries, (WOR)

Shares of Worthington Industries (NYSE:WOR) have inched up some 6% since the start of the trading week. The diversified metals processing company announced the acquisition of Palmer Tank, a manufacturer of tanks, predominantly used in the oil and gas industry.

The Deal

Worthington Industries announced that it has agreed to acquire Palmer Tank in a $113.5 million deal. Palmer Tank, which is currently privately held, manufactures steel and fiberglass tanks for the oil and gas industry, the chemical industry and for wider industrial applications.

The Kansas-based city currently employs 200 workers, and is strategically located to serve customers in the North Dakota "Bakken" formation as well as fields in the North of Texas.

Combined, Worthington and Palmer Tank are positioned to better serve the US oil and gas market. The deal will increases the company's exposure to the fast growing energy markets.

Andrew Billman, President of Worthington's business segment commented on the deal, "The Palmer business strengthens our energy position and fits our strategy to geographically expand in the oil and gas industry. When combined with our alternative fuel cylinder business and our entry into the cryogenics area, we are broadening our energy product offerings."

Over the past year, Palmer Tank generated over $70 million in revenues. As such the deal values the company at roughly 1.6 times annual revenues and roughly 5 times annual EBITDA. As the deal will be financed with low cost debt, the deal will be accretive to earnings per share by the tune of $0.15-$0.17 per share per annum.


Worthington Industries ended its third quarter of its fiscal 2013 with $37.4 million in cash and equivalents. The company operates with $438.2 million in short and long term debt, for a net debt position of roughly $400 million. Following the deal, the net debt position of the firm increased to roughly $530 million. Yet Worthington continues to have access to cash by means of a $390 million revolving credit facility.

For the first nine moths of the fiscal year of 2013, Worthington generated revenues of $1.91 billion. The company net earned $104.8 million for the period, or $1.46 per diluted share. The company is on track to generate annual revenues of $2.7 billion on which the company could earn around $160 million.

After the recent uptick in the share price, the market values the company at $2.2 billion. This values the company at approximately 0.8 times annual revenues and 13-14 times annual earnings.

Worthington Industries pays a quarterly dividend of $0.13 per share, for an annual dividend yield of 1.6%.

Some Historical Perspective

Shares of Worthington have mostly traded around the $20 mark over the past decade. Following the financial crisis in 2009, shares hit lows of $7 at the start of that year. Shares steadily rose from that point of time, currently exchanging hands at all time highs of $32 per share.

Between 2009 and 2012, Worthington consolidates its annual revenues just north of $2.5 billion. Yet the company has finally showed some growth, as revenues for the first nine months of the year are up 7.2% compared to last year.

While revenues were stagnant, the company improved its operating profitability in each consecutive year over the past four years, and it retired more than 10% of its shares outstanding over the time period.

Investment Thesis

Investors applauded the deal with Palmer Tank which will expand Worthington's operations at a reasonable price.

The $113.5 million deal will expand firmwide revenues by merely 3%, valuing Palmer at 1.6 times annual revenues. This is double the revenue multiple at which Worthington is currently valued.

Yet Palmer is incredibly profitable. The valuation at 5 times annual EBITDA, and the expected accretion of $0.15-$0.17 per share, implies net earnings after financing costs could increase by some $11 million per year. Even after considering the debt financing costs, the deal values Palmer at just 10 times annual earnings, compared to Worthington's own valuation at 13-14 times annual earnings.

Overall the deal seems to have been executed at extremely favorable levels, and boosts the growth profile of the overall company. As such the 6% jump in the Worthington's share price is completely justified, given the significant accretion following the completion of the deal.

The overall valuation of Worthington remains fair, despite the fact that shares have already returned some 22% so far in 2013. Despite the fact that shares are trading at all time highs, shares are fairly valued at these levels, as Worthington continues to create long-term value.

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.

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