Tenon's US operations under US$110M private equity offer   30 Aug 2016

Tuesday 30 August 2016 09:59 AM

Tenon's US operations under US$110M private equity offer

By Pattrick Smellie

Aug. 30 (BusinessDesk) - Taupo-based wood processor Tenon's US operations are under offer from a New York-based private equity firm for US$110 million that the company's directors say will allow a substantial capital return shareholders, despite a NZ$31 million writedown in the carrying value of the assets to be sold.

Shareholders will be asked to approve the deal in November, assuming no better offer appears and that an independent assessment by investment bank Grant Samuel supports the deal.

An initial Grant Samuel valuation puts the value of Tenon's North American operations at between US$108 million and US$129.5 million, making the offer from Brooklyn-headquartered Blue Wolf Capital at the low end of the valuation range for an offer that has stemmed from a strategic review of the company's fortunes that was initiated last August.

The announcement coincides with an annual earnings showing Tenon's road to profitable recovery is becoming entrenched, with net profit after tax before the writedown and $3 million in strategic review costs coming in at $21 million for the year to June 30. Earnings before interest, tax, depreciation and amortisation doubled to $26 million before the costs noted above and a further $3 million of restructuring and impairment costs, $2 millon of which related to Woolworths Australia closing its home improvements chain.

The result was achieved on a 9 percent uplift in revenues to $430 million.

Net debt fell to $36 million, from $58 million at the end of the previous financial year, although directors said they would plan to "re-leverage" Tenon if the Blue Wolf transaction does not proceed, so that a capital return can still be made to shareholders, the largest of which is forestry bio-tech company Rubicon, with a 59.8 percent shareholding.

A final dividend of 5.6 cents per share, unimputed, has been declared, a 30 percent increase on last year's final dividend.

First listed on the NZX in 1996, Tenon pushed into the US market for high value wood moulding products in the mid-2000s, coinciding with the sub-prime mortgage and global financial crises, which poleaxed the US home building and renovations market and causing Tenon to report consistent losses until recently, when investment in both manufacturing and distribution started to pay off as the US housing market recovery has gained steam.

Ebitda and net earnings are "targeted to improve further," directors said in a statement, with annualised ebitda benefits exceeding $4 million projected alone from a $7 million New Zealand manufacturing plant upgrade completed in the last financial year.

In a letter to shareholders, chairman Luke Moriarty said the return to shareholders in dividends and share price improvement since last August's strategic review was around 50 percent, "closing much of the value gap" that directors have identified for some years as they considered various options to have value for the thinly traded stock better recognised. Those options had included a US sharemarket listing, but the review process identified a sale process as the most likely to unlock value.

Tenon shares bottomed out at 50 cents a share in December 2008, had recovered to around 80 cents by late 2012, and peaked at $2.80 in late December last year as speculation about a sale gathered pace. The shares closed yesterday at $2.52, with Grant Samuel providing an indicative valuation range of $3.01 to $3.25 following the Blue Wolf offer.

Blue Wolf's website reveals a private equity investor with multiple exposures in the healthcare and pharmaceuticals sectors, as well as holdings in various lumber, paper and wood manufacturing businesses.

It is proposing to acquire Tenon's US subsidiary, NACS, on a valuation that equates to an ebitda multiple of 7.3 times on the 2016 financial year result.

"Our large New Zealand manufacturing and sales operations fall completely outside this offer," said Moriarty, and the review would continue to run for those whether or not the Blue Wolf proposal succeeds.

Explaining the $31 million writedown, Moriarty said that was necessary "to align the carrying value of our North American assets with the Blue Wolf offer price".

"Our assets have always been accounted for under IFRS (International Financial Reporting Standards) at their 'value-in-use', i.e., their value to Tenon under our continued ownership and control, which you will understand can be quite different from a purchase offer received at any point in time, particularly in early cyclical recovery," he said. "We do not believe this writedown should in any way cloud your judgement as to the strength of the underlying operational performance of Tenon's North American operations in FY16 or its prospects in FY17 and beyond."

Majority shareholder Rubicon expressed no view on the offer, but said it concurred with the Tenon board's view that a capital return should be pursued even if the Blue Wolf offer did not proceed as "the best use of surplus cash being generated today in the absence of any obvious acquisition target".

(BusinessDesk)

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