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The Buyout Offer for This Cellulose Products Maker Is Cheap

Thursday - 5/2/2013, 3:17pm  ET

Recently, Buckeye Technologies received a buyout offer from Georgia-Pacific LLC to acquire the company for $37.50 per share in cash, with a total transaction value of around $1.45 billion, including debt. The buyout offer represented a 29% premium to the average closing price of Buckeye on the market last week. Right after the announcement, its share increased to as high as $37.86, its biggest gain in five years. Is a $37.50 price tag a fair value for Buckeye? Let’s find out.

Business snapshot

Buckeye is a leader in producing value-added, cellulose-based specialty products made from both wood and cotton with its manufacturing facilities in the U.S., Canada, and Germany. Buckeye is operating in two main product segments: specialty fibers and non-woven materials, with four main product categories including chemical cellulose, customized fibers, fluff pulp, and non-woven materials.

The majority of its revenue was generated from chemical cellulose’s products, accounting for 40% of total 2012 sales. Non-woven materials products ranked second, representing 27% of total revenue, while customized fibers and fluff pulp accounted for around 15% and 18%, respectively. Buckeye sells its products to customers in more than 60 countries around the world, with the U.S. being the biggest revenue contributor, accounting for 32% of total 2012 sales. Germany and Japan ranked second and third, representing 13% and 7%, respectively, of total sales.

Three things I like about Buckeye

There are three things I like about Buckeye. Firstly, the company has consistently generated positive cash flow in the past five years. Its operating cash flow rose from $92 million in 2008 to $172 million in 2012, while free cash flow increased from $43 million to $87 million during the same period.

Secondly, the company has been returning cash to shareholders via conservative dividend payments. In 2012, it paid $0.27 per share in dividends, with a dividend payout ratio of only 9.1%. Third, Buckeye has a very strong balance sheet. As of December 2012, it had $641 million in total equity, $59 million in cash and short-term investments, and only $99 million in long-term debt.

The most profitable but the cheapest

At $37.60 per share, Buckeye is worth $1.46 billion on the market. The market values the company quite cheaply, at only 6.22 times EV/EBITDA. Compared to its peers Rayonier and Weyerhaeuser , Buckeye seems to be cheap.

Rayonier is engaged in the production of high value specialty cellulose fibers and fluff pulp. The company is considered to be the seventh largest private timberland owner in the U.S., with 2.7 million acres of timberland and real estate in both the U.S. and New Zealand. Recently, the company reported very strong first-quarter earnings.

While its revenue came in at $393.7 million, net income tripled from the previous year, jumping from $53.4 million in the first quarter last year to $147.7 million this year. The significant rise in net income was due to the discontinued operating income of $44.4 million from the sale of the Wood Products business. Rayonier is trading at around $58 per share, with a total market cap of $7.1 billion. The market values Rayonier at a much higher valuation than Buckeye, at 14.5 times EV/EBITDA.

Weyerhaeuser is considered the world’s largest private owner of timberlands, with more than 6 million acres of timberlands, mainly in the U.S. In addition, the company also manages an additional 13.9 million acres under long-term licenses in Canada. Investors might be quite surprised with its incredible 1,200% rise in the first-quarter earnings results. Its EPS came in at $0.26 per share, a huge improvement compared to the EPS in the first quarter last year of only $0.02 per share.

The improvement in first-quarter earnings was partly due to the recovery in the U.S. housing market. Its CEO, Dan Fulton, commented: “Our wood products business reported its strongest quarterly earnings since 2005, as we effectively leveraged operational improvements in a strengthening housing market.”  

Weyerhaeuser is trading around $30 per share with a total market cap of around $16.5 billion. The market values the company quite expensively at 17.8 times EV/EBITDA. However, the company has the lowest return on invested capital at only 0.94%. While Rayonier generates around 10% return on invested capital, Buckeye is the most profitable company with the highest return on invested capital at 14%.

Income investors would like Rayonier the most with the highest dividend yield of 3%. Weyerhaeuser ranked second with 2.7% while Buckeye offers investors the lowest dividend yield at 1.2%. However, in terms of dividend sustainability, Buckeye seems to pay the most sustainable dividends with its conservative payout ratio of 12%. The payout ratios of both Weyerhaeuser and Rayonier are quite high, at 87% and 155%, respectively.

My Foolish take

I personally think that at $37.50 per share, Buckeye seems to be undervalued. The buyout price represented only 6.2 times EV/EBITDA for the company that generates the highest return on invested capital and has the most conservative dividend payout ratio among its peers. 

This article was originally published as The Buyout Offer for This Cellulose Products Maker Is Cheapon Fool.com

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