SCA’s Acquisition of Wausau Would Broaden Access to North American Tissue Market, a Credit Positive
16 October 2015
SCA's Acquisition of Wausau Would Broaden Access to North American Tissue Market, a Credit Positive
On Tuesday, Swedish global hygiene and forests products company Svenska Cellulosa Aktiebolaget SCA (SCA, Baa1 stable) announced that it had reached a definitive agreement to acquire US-based Wausau Paper Corp. (B2 review for upgrade) for $687 million, including reported debt of $174 million. The transaction price equals approximately 11x Wausau's reported EBITDA for the 12 months that ended 30 June 2015 (excluding expected synergies). Although SCA's leverage will likely increase, the proposed transaction is credit positive for SCA because it will increase its market share in the key North America tissue market and generate cost savings that will offset the initially high purchase price. Following the deal's announcement, we placed Wausau's ratings on review for upgrade.
Although SCA has access to sufficient cash, including SEK18.7 billion of unutilised committed credit lines and SEK5.41 billion in cash and other liquid assets as of June 2015, we understand that SCA will seek additional long-term debt financing to fund the acquisition. We estimate that Moody's-adjusted leverage, pro forma for the transaction, will moderately increase up to 2.6x
debt/EBITDA during 2016, from around 2.5x as of the 12 months that ended June 2015. We expect all credit metrics to remain commensurate with SCA's current rating, including EBIT margins of 10%-11% (we would consider a downgrade if this level fell below 7%) and retained cash flow/net debt of more than 22% (we could consider a downgrade if this level fell below 20%).
Although the initial purchase multiple appears high, SCA expects to generate $40 million in annual synergies against one-off implementation costs of $50 million by combining its existing Americas operations with Wausau's. The full effect of the synergies will be achieved three years after the acquisition closes, which the parties expect will occur by the end of first-quarter 2016, and stems from reduced costs related to sourcing, production, logistics, selling, general and administrative expenses, imports and increased volumes of premium branded products.
Competition in the North American market, which constitutes 30% of the global market, has intensified recently as a result of increased production investments in consumer tissue. However, the world's largest tissue market is highly profitable, with a much higher rate of annual tissue consumption per capita than in Western Europe, which ranks second and constitutes 22% of the
market. Wausau will complement SCA America's product offerings and broaden SCA America's access to North America, where Wausau holds a strong position in the commercial and industrial away-from-home tissue segment with a total tissue-production capacity of 190,000 tonnes.
SCA operates in more than 100 countries, developing and producing personal care products, tissue, publication papers and solid wood products. For the 12 months that ended 30 June 2015, SCA generated sales of SEK111.17 billion. Wisconsin-based Wausau manufactures and markets towel and tissue products, and soap and dispensing systems through multiple brands for the commercial and industrial away-fromhome market in North America. Wausau generated revenues of approximately $361 million for the 12
months that ended 30 June 2015.
The boards of directors at both companies have approved the merger, which awaits approval by regulators and Wausau shareholders.
