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Sappi Limited: Acquisition of Cham Paper is credit positive for Sappi

On 28 February, Sappi Limited (Sappi, Ba2 positive) announced that it concluded the acquisition of Cham Paper Group (Cham) for a total consideration of CHF147 million (an equivalent of around US$150 million), implying roughly 6x EBITDA multiple. This is credit positive for Sappi, because it will strengthen Sappi’s position in profitable and growing specialty papers, thus diversifying the group further beyond structurally declining coated woodfree (CWF) paper. In addition, we expect the purchase price to be paid from internal sources, so the acquisition will lead to deleveraging on gross debt basis.

Sappi estimates that with a total annual paper capacity of 160 thousand tonnes Cham generated €183 million sales and €20 million of EBITDA in 2017, implying EBITDA margin of roughly 11%. While this is somewhat below Sappi’s average EBITDA margin (around 15% in 2017), we believe that there is potential for synergies that could at least partially offset the somewhat dilutive effect on profitability. Cham’s product portfolio is largely complementary to that of Sappi and provides the group with access to new customers, which brings opportunities for cross-selling.

Cham’s offering is centered around coated specialty papers for flexible packaging and label printing used mostly in food, pet food, cigarettes, beverage and pharmaceutical industry, which are end market with generally fairly resilient demand. It is also active in the pressure sensitive market in production of tapes and self-adhesive labels and process liners in industrial production, which grow at around mid-single digit % per annum. With the acquisition Sappi will also strengthen its position in paper for digital large format printing and industrial inkjet printing, which are niches that have seen very strong double digit growth over the last couple of years.

We expect that the acquisition will be funded from internal cash flows. As of 31 December 2017 Sappi reported around US$620 million cash on balance sheet and we expect that it will continue generating positive free cash flow in financial year-end September 2018 despite increased dividends and capital investments. As such we do not think that the transaction will jeopardise Sappi’s liquidity, which is further supported by a newly negotiated €525 million revolving facility due in 2023, which will replace the €465 million facility. On a proforma basis without considering any synergies, Moody’s adjusted gross debt/EBITDA will improve to 2.8x from 2.9x for the 12 months to December 2017 period.

The acquisition is in line with Sappi’s Vision2020 strategy that aims to diversify the company beyond CFW, which still generates over 50% of Sappi’s revenues and has experienced structural decline on average 3-5% p.a. over the last decade. Through accelerated investments and acquisitions Sappi aims to strengthen its position in structurally growing specialty papers, paper-based packaging as well as dissolving wood pulp, where the company is already one of the key global players.
www.moodys.com

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