North America: Liquidity and Leverage – Who is structured for Growth?

This report by Pöyry Management Consulting is the fourth in an on-going series that draws on expertise from Pöyry’s global offices to update readers on the opportunities and challenges facing tissue producers today. The first report in August 2010 issue of Over the Wire-Tissue Edition focused on changing consumer behavior in North American tissue markets. The second report in October 2010 issue examined the impact of Clearwater Paper’s acquisition of Cellu Tissue on the tissue market in North America. The third report in November 2010 issue explored supply side perspectives and global tissue trade.

In this fifth "From the Experts" report, Pöyry Management Consulting breaks down the cash flow, liquidity, and leverage of key publicly-traded North American tissue companies to better understand which players are in the best financial position to pursue growth initiatives. It takes a financial perspective to determine whose balance sheet is structured to make the next big move.

Favorable market fundamentals of the tissue paper products industry in North America are enticing a wave of investments in the form of new greenfield projects and mergers and acquisitions activity. To determine which player is well-positioned financially to pursue growth initiatives, Pöyry Management Consulting analyzed the key liquidity and leverage metrics of publicly-traded companies.

In the table below, companies best positioned to take advantage of M&A opportunities are characterized by high cash flow, low or moderate leverage, a large cash reserve, and low near-term debt obligations. The focus of this analysis is on mid-tier producers and excludes Kimberly-Clark, Procter & Gamble, and privately-owned Georgia-Pacific

Based on this analysis, key tissue players face some obstacles before another large-scale transaction the size of the Cellu Tissue-Clearwater combination can take place. However, some players, such as Wausau Paper, have very low leverage and may have the capacity to take on additional debt to finance a smaller transaction.

Cascades Inc. has historically grown through acquisitions and their tissue business is a growth platform, as illustrated by the acquisition of Atlantic Packaging last year. However, although the company has a significantly positive cash flow (EBITDA for the last twelve months was $410 million, excluding special items), the company is more highly leveraged than the peer group. Additionally, its revolving credit facility expires at the end of 2011, and the outstanding balance of C$328 million will have to be repaid or refinanced. Amending the existing credit facility is a priority for Cascades.

Finally, other core businesses (e.g. containerboard) are competing for financial resources. Having closed an acquisition in the tissue sector just last year, another transaction in this space may not be a priority.

Wausau Paper
Wausau Paper's Towel & Tissue business has posted record results and continues to generate a healthy profit. Its strategic initiative to grow in higher margin businesses suggests that this business may be a growth platform. With very low leverage and no near-term debt maturities, Wausau may have the capacity to take on more debt to finance a transaction or large capital investment.

Orchids Paper Products
In 2010, Orchids Paper initiated several capital expenditures to install a new converting line and warehouse, increase the capacity of the waste water treatment plant, and other upgrades. This has reduced the cash balance and caused the company to draw from its revolving credit facility. It has also reduced the cash flow for the company.

Additionally, $7.9 million of the $8.0 million credit facility is currently outstanding and expires in 2011. Amending the credit facility is a priority for Orchids Paper. However, the large capital expenditures observed in 2010 can be expected to normalize following the completion of the projects and the company also has low leverage. Orchids Paper is a much smaller player and partnerships or joint ventures may be a better avenue for growth.

Clearwater Paper Corp.
Clearwater Paper has already taken significant growth initiatives in the tissue space. Post-acquisition integration efforts and the planned investment in Shelby, N.C, means that it is unlikely Clearwater will pursue further acquisitions. Additionally, Clearwater issued $325 million in new net debt to help finance the purchase of Cellu Tissue, which substantially increased the company’s leverage (from net debt being less than 1 times LTM EBITDA to an estimated 2.4 times LTM EBITDA).

Other Considerations
The market fundamentals of the tissue industry may entice outside players to invest as well. Competitors in other sectors of the forest products industry, facing declining demand in traditional products, may also be interested in expanding their product lines into tissue. Additionally, the private equity industry has billions of un-invested cash and financial players may be attracted to the stability of the tissue industry.