York, Pa.-based PH Glatfelter (GLT -4.52%) has agreed to buy Canadian Fortress Paper's German subsidiary, Dresden Papier, for approximately $209 million. Glatfelter says it expects the deal to be immediately accretive to earnings, boosting annual profits by about $0.25 per share.
Dresden is the world's leading manufacturer of nonwoven wallpaper base materials and is a supplier to "most of the world's largest" wallpaper manufacturers. Glatfelter says it is acquiring the company to enhance its share of "niche global growth markets for specialty papers and fiber-based engineered materials," a market Glatfelter expects to grow at 10% annually going forward.
Glatfelter, whose own business has been in decline, appears from one perspective to be paying through the nose for the growth opportunity. Its purchase price works out to about 1.4 times the target's annual sales. In stark contrast, Glatfelter's own P/S ratio is a lowly 0.5. Looked at another way, however, Glatfelter may be getting a bargain.
Dresden's earnings before interest, taxes, depreciation, and amortization, or EBITDA, came to $38 million last year, resulting in a 5.5 multiple to EBITDA for the purchase price. Valued on EBITDA, Glatfelter's own shares cost 6.3 times EBITDA. So far from overpaying, a case can be made that Glatfelter is actually getting a bargain.
Investors appear to be going with the latter theory today. In response to news of the acquisition, investors bid up Glatfelter shares a whopping 7.1%, to close the day at $20.46 per share.
