VRTV - Veritiv

[kfh227]

Seth Klarman's hedge fund firm Baupost Group has filed a 13G with the SEC regarding shares of Veritiv (VRTV).  Per the filing, Baupost now owns 14.06% of the company with 2,249,601 shares.

 

This company went public on July 2.  Now to figure out why the interest by Klarman.  This isn't his typical stock so I'm curious.

 

Veritiv is a spin off of International Paper.  From the IP earnings call transcript for Q2 2014 (July 29, 2014):

Finally, we completed the xpedx transaction on July 1, as IP spun off our North American distribution business and merged it with Unisource to create a new publicly-traded company called Veritiv, which is now trading on the New York Stock Exchange. And I want to wish all of our former colleagues and Mary Laschinger, the Chairman and CEO of Veritiv, a lot of success going forward, and wish the new company well.

 

Earnings will be announced on Aug 13 (tomorrow).

 

Things that make me raise an eye brow:

1) market cap of $600m

2) Expected annual revenue of $9-$10 billion.

 

(1)+(2) => cheap at a glance

 

Total debt is $300-$400 million which is not a lot given the expected revenue stream.

 

That's all I have for now.

 

[topofeaturellc]

well - iIt looks like EBITDA pro-forma gaap is like 110 ish Mgmt Synyrgy target is 150-225.  So bottom of the range is 260 EBITDA

 

The EV is 600+750 its unclear to me if that 750 number includes the earnout to IP- I think that's 100? So 5x EBITDA for a business that should generate a ton of CF to delever, but is going to shrink. Something like 75% of revs are in decline. Tho no idea about EBITDA.  Also don't know if working capital is a source or use of funds as it shrinks.  I'd guess source?

 

Its interesting.

[yadayada]

Edit, didn't see your comment :). So 260 ebitda.

 

We expect that the Merger will provide significant opportunities for the combined company to capture cost savings and other synergies. We are targeting annual cost savings and other synergies in the range of approximately $150 million to $225 million, which we anticipate will be fully realized by the end of 2018. We anticipate cost savings and other synergies in the following areas: overhead, strategic sourcing, supply chain efficiencies, optimizing the ability to service customers and reduction of fixed costs (e.g. warehouse rationalization). We currently expect the one-time costs associated with achieving these cost savings and other synergies to be approximately $225 million over a five-year period. We currently expect to realize 15-25% of the net synergies from this transaction in fiscal 2015, 50-60% in fiscal 2016 and 80-90% in fiscal 2017.

So in 2015 you can expect about 133m in ebitda. 2016 you can get 185.

 

Interest is 26m. Capex is? Seems they are selling assets. So maybe 10-15m in capex at most? And they have a lot of NOLS. So Net current assets of about 4-500m. And 80-90m of FCF in 2015, and about 140-150 in 2016.

 

Any thoughts on their business?

[topofeaturellc]

interest number is going to be higher as they did a levered recap to partially buy out IP

 

As a business - Its dunder-mifflin. Seriously.  Its probably an OK biz, but it shrinking vols and negative price on what is probably a mostly fixed cost base.

 

Basically its "can we pay off the debt and then what is the container board distribution biz worth"  Its not an obviously easy idea if you know what I mean.

[yadayada]

yeah, the packaging businesss seems do to about 2.6b$ in revenue and about 75m$ in operating income combined (without counting synergies, and seems to be slightly growing Their Paper and janitor business seem to be in decline. The latter actually losing money.

 

So I guess what we have to ask ourselves (or the company) here is , how much of those synergies go to the packaging business. And how long will the other two survive and generate cash?

[dbuch]

Anybody look at this recently?

 

Looks like Print and Publishing are slowly declining businesses with revenues declining 5-6% per year with 2-3% margins while Packaging and Facility Solutions end markets are growing about 2-3% a year and have higher margins (around 6% for Packaging and 3% for Facility Solutions) and contributes over half of total EBITDA. If you assume this trend continues Packaging and Facility would make up 78% of EBIT by 2020 diminishing the impact that print has on the business over time. If you can get past the fact they are a distributor of paper they look attractive.

 

Veritiv expects to generate $150M to $225M in synergies over 2014 EBITDA of $135M which would equate to $175M FCF assuming $60M interest expense and $20M CapEx and 35% taxes. That would be over $10 share in 2017. They should be able to rapidly delever if needed or buy back substantial stock. They could very well trade over $100 within 2 years.

[AJDelphi]

I completely agree with your assessments. I think they have the 3 bad businesses with Print, Facilities Solutions, and Publishing which will continue to decline. But the Packaging business is OK and I would think will keep growing. You also have much better margins in that business.

 

With the merger there are plenty of synergies (cost savings). For example, in Minneapolis you had a Xpedx facility and a Unisource one. They closed down the Xpedx facility and moved all the employees and shiping into the larger Unisource facility. They are doing the same thing at plenty of other locations around the country and this will take a few years to get completed.

 

When the 10-K gets filed in 2016 I think it will be a lot easier for people to see the earning power.

[PSV_Cannibal]

It appears this stock generates >$6 FCF per share ($100m to equity) presently... if so, that is a FCF yield exceeding 20%.  Is that what you come up with?

 

My impression is that investors don't like this company because of the optics of the print division declining, a lot of which is intentional from the pruning of unprofitable contracts (as per the earnings calls).  This pruning also had the added benefit of releasing working capital, thereby bolstering cash flow.

 

So hopefully the clouds part soon, meaning that investors can begin to see this as a packaging company.  A rep from the company told me several months ago that all divisions share common infrastrucuture (warehouses).  However, this would not necessarily preclude them from divesting or spinning off a division in the future, if that is seen as the best course of action.

[AJDelphi]

It appears this stock generates >$6 FCF per share ($100m to equity) presently... if so, that is a FCF yield exceeding 20%.  Is that what you come up with?

 

My impression is that investors don't like this company because of the optics of the print division declining, a lot of which is intentional from the pruning of unprofitable contracts (as per the earnings calls).  This pruning also had the added benefit of releasing working capital, thereby bolstering cash flow.

 

So hopefully the clouds part soon, meaning that investors can begin to see this as a packaging company.  A rep from the company told me several months ago that all divisions share common infrastrucuture (warehouses).  However, this would not necessarily preclude them from divesting or spinning off a division in the future, if that is seen as the best course of action.

 

Yep about $6 is what I see. And with further cost cuts coming in 2017 and some in 2018. So yea I hope with time other investors get more comfortable with it and pay a higher price  :)

[wjsco]

Y'all arent quite there yet w/ ebitda

 

Yes, generating 150-225 in synergies, but core ebitda also declining.

 

See VRVT's prospectus, page 19 - expect incremental ebitda improvements over next few years, with an expected improvement of $100 by 2017.

 

So, start at 135-145, plus 100 in 2017 gets us to 235. Since 2017 is expected to see 80-90% of synergies, and 2016 50-60%, maybe an additional 45-55 million in ebitda in '16? Midpoint of '14 ebitda was $140, plus $50, puts us at $190 in 2016, and another 50 the following year gets us to $235 in 2017.

 

But, not $285 in 2016.

[dbuch]

I think the 100m includes the incremental cost of 225m to achieve those synergies. Run rate Ebitda should increase by at least 150m.

[wjsco]

You could be right, but it doesn't make sense that they would include the restructuring charges in their target EBITDA.

[dbuch]

Anybody look at this recently? Dropped from $56 to $45 on a secondary from UWW. This shouldn't be dilutive as these shares are already outstanding and Veritiv is actually buying 313,600 of the 1,568,000.

[wjsco]

Anybody look at this recently? Dropped from $56 to $45 on a secondary from UWW. This shouldn't be dilutive as these shares are already outstanding and Veritiv is actually buying 313,600 of the 1,568,000.

 

I haven't, but I think I figured out the situation. when IP spun it out, basically they said that they had explored all strategic alternatives to dump veritiv's business, but nothing had worked. So, basically, they merged their paper distribution business with one of their competitors. but, both companies were not doing great financially, and you can't spin an insolvent company. So they included a packaging distribution business to support the paper dist business - they're currently consolidating all the paper distribution stuff, those are the restructuring charges, and the packaging business is generating the cash flow to support the restructuring.

 

So, once they finish restructuring, you'll have a leaner paper distribution business, and that's a declining industry. But you'll also have a packaging distribution business, which isn't declining. KapStone Paper is a corrugate products/packaging manufacturer, and the CEO has been ranked as #1 in paper and packaging a number of times, I think in Inst Investor magazine or something. Anyways, in 2015, Kapstone acquired a packaging distributor for 10x ebitda (pre synergies). So we know the CEO of Kapstone is sophisticated, and we know he's a strategic buyer, and he paid 10x for the packaging dis business - so, 10x ebitda might not be a bad number for comparable analysis. If you dig into veritiv's numbers, I think that their packaging dist business does like $250m ebitda on its own. So once the paper dist ops are consolidated, you'll have paper dist and packaging dist, and packaging dist is worth 9-10x ebitda? So packaging alone is worth >$2b, maybe $2.5b, and you get paper distribution for free. simple sum of the parts...Klarman likes this for liquidation value. even assuming the paper dist operations are worth ZERO, you can liquidate their inventory, which is a huge number - even though it's a declining business, they have so much $ tied up in working capital, and my guess is that they'll work down their inventory to generate cash as the business declines. And then, the packaging dist business could be sold for like $2-2.5b, maybe. So, liquidation value / sum of parts. I think that, once the paper distribution consolidation is complete, there will be another corporate action to highlight the value of the packaging business - either another spinoff, or an asset sale.