Description

Glatfelter was last written up in 2005 as a long.  And if you bought then, you'd have lost 75% or 34% if you reinvested dividends into the stock or took the cash and did nothing with it, respectively.

GLT was historically an ok-not-great business that traded at a ~9x average (in the decade through 2021) trailing EV/EBITDA multiple.  Then they ended up wildly overpaying for Jacob Holm in late 2021 at the peak of the cycle which, up until a few days ago, seemed to represent a real existential threat to the company's solvency.  I've been paying close attention to the GLT story since they brought in a turnaround CEO, Thomas Fahnemann, in July of 2022, to fix things.  I'll note that Carlson Capital went 13D in October 2022 and currently holds a 16% stake in the company (in addition to holding some of its notes).  It is significantly underwater on its equity investment.

On 2/12, Fahnemann announced an effective solving of the company's liquidity issues, and the stock is up 60% since.  Specifically, Berry Packaging (BERY), in conjunction with GLT, announced a Reverse Morris Trust transaction whereby it will spin-off its non-wovens and films businesses (the bulk of its "HH&S" segment) and merge it with GLT to create NewCo.  In addition to the existing $785mm in 4.75% fixed November 2029 GLT notes that will stay at NewCo (why refi 5+ year 4.75% paper?), NewCo will raise another ~$1.3B that will be used to pay BERY a $1B dividend and pay off GLT's other debts (Angelo Gordon TL). The deal is expected to close in 2H 2024 and is subject to a GLT shareholder vote.  The deck can be found here. 

For its contribution (I calculate a $775mm EV, or 28% of NewCo's $2.7B pro-forma EV) GLT will own 10% of NewCo equity.  BERY people will run the ship but GLT gets some board representation.

Normally in a vanilla spinoff, you have no true idea what the two pieces are being independently valued at pre-spin.  In this case, GLT @ $2.05 has a market cap of $92mm, which implies SpinCo's market cap sits at $925mm today.  Based on the assumed and new debt that will be raised, and any cash flow from here until close, NewCo is expected to have $1.8B of net debt at the time of close.  This equates to a $2.7B pro-forma EV today.

NewCo has put out a $455mm pro-forma Adjusted EBITDA bogey to the market, and expects 4x net leverage at close based on that figure.  This $455mm includes $50mm in hard cost synergies.  There are no revenue synergies baked into expectations.  I'll point out that management seems adament that the business is at a trough and is expected to be an organic grower from here.  I calculate GLT at $2.05 represents just under 6x the management EBITDA estimate and 0.75x sales.  If you give it a year at 5% EBITDA growth, and the multiple moves up a turn to 7x, I see a NewCo market cap of $1.5B, or about a 70% return from here in a year or so.

I understand the trading dynamics (BERY holders will see a NewCo line item in the portfolio at ~1/7th the size of the legacy plastics packaging business) will likely create some element of price indiscriminate selling at the time of the spin.  I put on a 1/3 - 1/2 sized position now, and will look to opportunistically add at the time of spin should this get puked.  

I see nearly no risk that GLT shareholders don't approve the deal, but there is a risk capital markets don't support lending into a 4x net leverage situation with spotty recent financial performance.  To the extent the quantum of new debt supportable by NewCo falls short of the $1.3B target, it's unclear whether BERY's dividend will come down, or whether the entire deal would need to get re-cut.

Catalyst

Deal closing in 2H 2024