Asaleo Care (AHY.AX) – Expected Higher Offer – Upside TBD

Current Price: A$1.30

Current Offer: A$1.26 (higher bid expected)

Upside: TBD

Expiration Date: TBD

Press Release

 

On the 10th of December, Australian tissue and personal care products manufacturer Asaleo Care has received a non-binding proposal from its largest shareholder Essity. Consideration stands at A$1.26/share in cash. Shares are currently trading at a premium reflecting market's expectation of an increased bid. Merlon Capital (1.6% stake) has already expressed its dissatisfaction with the price. The buyer is credible, well-funded, holds a 36.2% stake in AHY.AX, and has a long-lasting business relationship with AHY. The strategic rationale is solid and the acquisition timing appears to be opportunistic. Overall, it seems quite likely that the buyer will increase the offer price

Downside to pre-announcement is 22%. However, the risk of the buyer walking away seems to be low. If the transaction goes through at current offer, the downside is just 3%.

 

Favorable aspects

  • AHY response to the proposal showed that the board is pushing for higher valuation. The company stated that the current price "reflects low takeover premium and opportunistic timing" and reminded that the company saw a positive impact from COVID this year, has retained its previous guidance, and will likely pay a final dividend for 2020.
  • 1.6% shareholder Merlon Capital said that the offer is inadequate and "does not factor in the long-term cash flow outlook for the business, comparable trading multiples (reflecting record low rates) or a takeover control premium". Moreover, the shareholder noted that it would like to see the offer in the higher range of their valuation - A$1.67/share.
  • The buyer is definitely credible and seems committed to proceed with the transaction. Essity is a giant ($22bn market cap) Swedish hygiene/health company and has been a major shareholder of Asaleo Care for many years now. Before Asaleo Care IPO, Essity owned 50% of the company through JV with PEP. After the listing, it retained 33% ownership in the company (now holds 36%). Aside from ownership, both parties have a long-lasting business relationship - AHY is licensing certain brands of Essity (Tork and TENA), which generate the majority of Asaleo earnings (all B2B segment + part of retail). Last year both parties have agreed to extend the agreement for five years, until 2027. Buyer's intentions seem firm and some media reports indicate that it has requested only one week of due diligence.
  • In the current ownership structure, AHY is not a typical holding for Essity. the Swedish giant usually owns either 100% of its subsidiaries, or around 50% through JVs (Asaleo is the only sub of Essity that's not held through JV). Given the opportunistic timing, it seems that Essity has decided that now is a good time to fully acquire the rest of Asaleo Care.
  • Financing is not an issue, acquisition would be funded by cash on hand.
  • Timing is somewhat opportunistic. AHY saw a positive impact from COVID induced by the increase in demand for Healthcare and Food Processing divisions (B2B) and panic buying during the early stages of COVID. In H1 revenues were up 10% YoY, underlying EBITDA was +24% YoY, NPAT +50%. The company expects its full-year underlying EBITDA to reach the upper range of A$84m-A$87m guidance (6% improvement YoY). In the middle of the year, the company exited certain loss-making businesses (baby diapers in NZ) and closed the related manufacturing facility.
  • The second-largest shareholder Allan Gray Australia (Africa's largest private investment manager) holds 18% of Asaleo and would likely support the merger (no official comments made yet). Allan Gray has acquired its stake in 2018 buying around the steep fall in AHY share price after the guidance was cut. Its average price paid should be slightly north of A$1/share. AHY share price has been hovering around A$1/share for two years already. The merger with Essity would result in the green for Allan Gray Australia. Together with Essity's stake, that would make 54% of the voting power, while scheme mergers in Australia require approval from 75% of the votes cast.
  • Although there are no public peers for comparison, the historical trading multiples suggest that the takeover premium is low. AHY financial performance has declined since its IPO in 2014 (was done at 9x forecast 2014 EBITDA) as the company was losing its pricing battle with the competitors. However, in the last two years, the company has done a good job reducing its debt and by the end of 2020 will have two years of positive growth.
  • All in all, some kind of price increase can be expected here to persuade the board and remaining shareholders.

 

Cons/risks

  • This is still a non-binding proposal, so a firm offer could fail to materialize.
  • Larger shareholders might vote against the merger and it might be difficult to reach 75% approval threshold.
  • Theoretically, there's a chance that Essity could change its proposal to a hostile takeover/tender offer and aim for a 50% ownership instead.

 

AHY.AX

Asaleo Care IPO'ed in 2014 at A$1.65/share (closer to the lower range of the offering). The company produces tissues and various personal care products.

Other shareholders:

5 COMMENTS

  1. Ilja

    Several positive developments here:

    – AHY has outperformed its FY2020 year underlying guidance (A$84m-A$87m) and reached A$87.2m (A$89.2m from the continuing business). The guidance was announced in August (before Essity’s proposal).
    – New guidance expects EBITDA to grow to A$90-A$93m in 2021 and then another 10%+ in 2022. So the business seems to be recovering from the 2018 fall. So EV/FY21 EBITDA multiple would be at 8.7x, offering completely no takeover premium compared to historical valuation.
    – The board has issued a response to Essity stating that it fundamentally undervalues the company and is materially inadequate (in bold). The board argues that based on the strong recent performance of the company in 2020, expected further growth, substantial synergies, cost savings, and EPS accretion the merger would produce for Essity. Nonetheless, the committee has stated that it “remains open to further engagement.”
    – 42% of the minority shareholders are opposing the offer.

    All of the above strongly enhances the expected higher offer thesis and there is a substantial chance that Essity will not let go of this acquisition and bump the price. Meanwhile, current price hasn’t changed from the initial write-up.

    Pre-announcement price is A$1/share, however, even if the buyer walks away, AHY should trade materially above that given the recent outperformance, new guidance, and strong indication from the board that A$1.26/share is undervaluing.

    https://www.asaleocare.com/ASXAnnouncement/DownloadAnnouncementFile?id=1449465

  2. Platitudes

    Do you have any notion of what a fair or fairer price might be?

    Also, what is the compelling reason for Essity to bid higher? Essentially bulls are expected to believe Essity will bid against itself based on a modest first proposal and improving results/outlook.

    1. Writser

      Well, a scheme of approval needs a 75% shareholder vote in Australia AFAIK. With shares trading over the offer price and 42% of the minority shareholders opposing the offer (27% of the total sharecount) according to the management presentation this offer seems dead on arrival. Seems pretty clear to me that *IF* Essity wants this they have to pay more.

  3. dt

    As expected, Essity increased the bid to A$1.45/share (A$1.40/share in cash plus A$0.05/share in dividends). Both companies have entered into a scheme implementation agreement. Minority shareholders can still derail this transaction (not sure if they support the deal at a new price), but the likelihood of further improvements in the offer is low.

    https://www.asaleocare.com/ASXAnnouncement/DownloadAnnouncementFile?id=1458560

    With shares are trading at A$1.43/share now, we are closing this idea with 10% return in 2 months.

  4. Writser

    Nice little idea, thanks for sharing. FWIW I don’t think it is impossible that there will be a bit more pushback by investors. The initial offer was quickly discarded by a wide coalition of minority investors and the board. This is “only” a 15% bump, even less if you look at EV. The board quickly changed minds, but will all investors do too?

    Tiny spread but holding might not be the worst idea ever. Though this is just a thought, I liked the idea way better initially.

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