Description
Spicers Ltd is a P.A. idea, and a quasi-private equity idea (investors should plan for a 2-3yr holding period and low liquidity in the interim).
Big Picture Summary
Spicers has a massively over-capitalized balance sheet whose value was trapped by a broken capital structure and conflicted board of directors. Activist investors recently forced a resolution of the capital structure problem and just replaced the entire board. The 'bad' business (commercial print) is stabilizing and the good businesses (packaging, signs & display) are growing nicely.
Brief History & Business Overview
Spicers Ltd (formerly PaperlinX) used to be a multi-billion dollar global paper distributing & manufacturing conglomerate. Over the past 15 years, the business has declined significantly and international assets were either bankrupted or sold-off. During this time, the company's market value declined from over $5 billion to less than $100 million today.
Today, the company generated about $380 million in revenue. $300 million comes from Print & Packaging (declining high single digits annually) and $80 million comes from Sign & Display (growing double digits).
The Print & Packaging business can be further broken down in to 4 segments: Commercial print (60% of the total revenue and the only declining segment); Commercial packaging; Industrial packaging; and Labels (e.g. pressure sensitive lables applied to consumer packaging).
Capital Structure Resolution
In 2007, Spicers issued $275 million of preferred stock. This preferred stock had no voting rights, but did prevent the company/board from using any cash in preference of common shareholders. As the core business declined, the preferred stock stopped paying dividends and the price fell from par ($100/sh) to about 10 cents on the dollar ($10 / share). The common share price fell from $4+ per share to less than 3 cents.
In the past 6 years, the company's board and senior management changed hands, with new common shareholders taking over who did not understand the complexity of the broken capital structure and the rights of the preferred shareholders. Hedge funds bought up the preferred shares, and a stand-off ensued whereby the hedge funds wanted the capital structure resolved, but the common shareholders claiming they deserved the company b/c they had all the voting power.
After a bitter years-long dispute, an agreement was finally reached and the company was split 2/3 to preferred shareholders and 1/3 to common shareholders at the end of June 2017.
Then on September 6, 2017, an extraordinary general meeting was held, and the existing board was replaced with new board members, all (except the chairman) of whom are significant shareholders. The new board collectively owns just over 25% of the total shares outstanding.
Balance Sheet / Over-capitalization
Due to the broken capital structure, the company could not use its cash balance to make significant acquisitions (preferreds could block it) or pay any dividends or repurchase shares. Also, the company could not get access to standard working capital lines of credit, so the company had to fund an unnecessarily high amount of its working capital assets itself (and also had problems with suppliers getting standard delayed payment terms).
The company currently has over $30mm of cash on the balance sheet against only $2mm in borrowings. Further, the company has $160 million of inventories and receivables against only $85mm of payables. The 'net asset' value here, excluding property on the books at $9mm, is over $100 million.
With the capital structure resolved, the company can now use its cash balance for share repurchases, dividends or acquisitions. The company is also exploring options to increase its cash position via working capital improvements (i.e. revolvers and longer payment terms with suppliers).
Business Situation
The commercial print business, which distributes much of the paper used for things like annual reports and magazines, is in terminal decline, and the losses here have largely masked the operating profit gains and stability in the other businesses.
However, commercial print is beginning to stabilize globally and in Australia. In April, Spicers' two largest competitors combined, and how the market is effectively a duopoly. BJ Ball combined with KW Dogget, who now have about 61% market share. Spicers has over 25% share, leaving the remainder to 4 smaller players and some mom & pops. The dust is still settling on this deal, but early indications are positive from both a pricing perspective and competitor/inventory behavior.
Some recent news on stabilizing paper markets:
http://www.scmp.com/business/money/...e-rallyextend-2017-amid-limited-capacity-and
https://www.euwid-paper.com/news/singlenews/Artikel/manufacturers-announce-another-price-increase-for-uncoated-fine-paper.html
The other operating segments in Print & Packaging are profitable and grow organically at 1-2%/year (these comprise ~$120mm of revenue - commercial packaging, industrial packaging and labels).
The other main business, Sign & Display, grew 14% last year and is a leader in both New Zealand and Australia. Operating margins are low double digits.
Corporate Bloat / Mismanagement
The prior board had significant conflicts of interest and over-spent significant sums on 'services' doled out to the chairman's friends. As an example, one of the former largest shareholders - Communications Power - installed the board and in return, received a lucrative, 'off-the-books' consulting arrangement in excess of $500k/year. Also, the company paid significant legal and financial fees to the top firms in Australia (e.g. Arnold Bloch Leibler law firm), which I believe was done by the chairman to enhance his reputation and standing with the 'big players' in Australian corporate finance. With the legacy board gone, the company's annual run-rate overhead expenses should have significant opportunity for reduction.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Under the new board & capital structure, the company finally has complete flexiblity to unlock the significant value trapped on the balance sheet.
Further, the company's underperforming business - commercial print - may finally be turning the corner after the major consolidation that just occured in April 2017 (BJ Ball and KW Doggett merged, creating an effective duopoly).
The company's remaining businesses are stable and growing, and I expect the company's cash flow generation to grow in coming years and the cash balance to grow as well. I further expect this to lead to shareholder-friendly capital decisions, which may include share repurchases, dividends and/or corporate transactions.