Description

Summary: ABD is a company in transition, both from a fundamentals and shareholder perspective. It is a recent spin-off that is shifting to a new shareholder base and is also in the later stages of digesting a large acquisition (GBC via a reverse merger). What will emerge will be a predictable, cash flow generative business with sound economics run by a proven management team with a big market opportunity. At 10x 2007 free cash flow, ABD is a compelling investment, which will become obvious to the investment community over the next 12 to 36 months.

Management: The CEO & CFO have a reputation as rational, effective, managers focused on long-term value creation. Most importantly they have a proven track record. The recent acquisition (General Binding) is the 4th restructuring the CEO has done. The previous three were Master Lock, Waterloo Industries and ACCO Brands, all then divisions on Fortune Brands, from which ABD was spun-off. Each restructuring followed the same blueprint: take costs out while creating new products to generate sustainable long-term growth.

Fundamentals: ABD focuses on a few categories that have high relative market share (#1 or #2 positions; where can be premium offering) to minimize private label competition and be category winner (losers are #3-6 products that cannot compete w/private label). Customers (ODP, Staples) want fewer, better suppliers and have desire to link up with good one. ACCO + GBC offer complementary products and enable deeper scope (i.e. neither earned much in those lines where they competed with one another b/c of inferior share positions but combined entity has high relative market share in those categories). GBC was run for cash and under-invested in, which is an opportunity for ABD.

Growth Opportunity: The GBC acquisition is not the end-game as this could be a meaningfully bigger platform once infrastructure is in place. Acquisitions are likely to be European and where they can pick-off inferior competitors under stress.

Financials: ABD can reasonably achieve 15% EBIT margins long-term if they execute well, grow revenues in the mid single digit range and drive operating and financial leverage to the bottom-line. FCF is highly stable and 3-5x debt/EBITDA would be reasonable. $40mm GBC synergy # based on pre-closing, but this management team under-promises and over-delivers so that could be too low.

Upside: If they can grow the top line by 3%-5% and increase EBIT margins to 14%, largely via synergies ($45m), just from debt paydown (i.e. not even giving benefit for additional acquisitions or gross margin improvement), the 2008 fcf/sh number is $3.32 and eps is $3.10. If you assign a 15x multiple on the FCF figure, which is reasonable, it is a $50 stock (i.e. a double) in the next 36 months. And, there are numerous possibilities that could cause these numbers to be too low.

Risk: Our checks indicate the risk of pricing deflation due to growing non-branded product is low but we could be wrong. It appears we have reached the targeted balance by most retailers between brand and non-brand products on their shelves. There is also $900m of debt and management team hasn’t run a public company. Results will be messy for a few quarters.

Catalyst

Catalysts: integration costs and accounting moderate, earnings growth surface, and investors/sell-side discover the company.