Mondi’s acquisition of Powerflute is credit positive

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On 22 December, Mondi Plc signed an agreement to acquire 100% of the outstanding shares in Powerflute Group Holdings Oy, a division of Nordic Packaging and Container Holdings Oy (NPAC, B1 negative) for a total consideration of €365 million on an enterprise value basis, implying roughly a nine times EBITDA multiple. The acquisition is credit positive for Mondi because it will acquire a competitive and profitable asset without materially compromising its strong capital structure. This transaction is still subject to regulatory approval.

We expect that Mondi will primarily finance the acquisition from available cash and internal cash flow generation. As of 30 June 2017, Mondi reported around €100 million of cash and cash equivalents and we expect it will have generated healthy free cash flows in the low hundred million of euros in the seasonally stronger second half of 2017. Hence, we believe that if there is initially an increase in debt connected to the transaction depending on the exact timing of the closure, it will not be material, or will weigh on its Moody’s-adjusted leverage only temporarily owing to Mondi’s ability to generate strong operating cash flows.
Even if we assumed Mondi’s post-acquisition debt increases by the total consideration of €365 million (as compared to debt at end-June 2017), Mondi’s Moody’s-adjusted pro-forma debt/EBITDA would deteriorate only to 1.6x from 1.4x for the 12 months to June 2017, which would still position Mondi solidly in the Baa1 rating category.
Powerflute produces Nordic semi-chemical fluting (NSCF), which is the strongest form of premium fluting. Powerflute generates strong EBITDA margins (around 23% expected for 2017, as reported by NPAC), which is slightly above Mondi’s reported EBITDA margin of around 20%, one of the strongest in the industry.
Powerflute’s high profitability is reflective of its leadership position in a consolidated market with essentially only three players — Powerflute, Stora Enso Oyj and BillerudKorsnas — with high barriers to entry for new incumbents given that building new capacity is costly and access to customers and high-quality birch is not easy to establish. In addition, NSCF has unique characteristics enjoying greater firmness and humidity resistance compared to other types of fluting. Based on birch wood, it is also free of bacteria and toxins, which makes it particularly well suited for the fairly stable food packaging markets. Its premium quality also allows for premium pricing.
Powerflute operates an integrated pulp and paper mill in Kuopio, Finland with an annual production capacity of 285,000 tonnes. NPAC expects that Powerflute will achieve revenue of around €183 million and unaudited pro-forma adjusted EBITDA of around €42 million in 2017, which compares to Mondi’s EBITDA of roughly €1.4 billion for the 12 months to June 2017, as adjusted by Moody’s. Around half of Powerflute’s production is sold in Europe, while the remainder is exported globally. Powerflute will be integrated into Mondi’s Packaging Paper business unit. Mondi expects to close the transaction in the first half of 2018.

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