Rentech, Inc. (NASDAQ: RTK) has announced that it has acquired New England Wood Pellet (NEWP), the largest producer of wood pellets for the U.S. heating market. A slide presentation regarding the announcement appears on Rentech’s website, www.rentechinc.com. The Company’s management will discuss the acquisition on its first quarter earnings conference call, which is scheduled for May 13, 2014.
“NEWP is the leader in the growing U.S. market for wood pellets used in heating applications. The acquisition brings additional cash flows and profitability to our wood fibre business. In addition, NEWP’s business broadens our product offerings, customer base and geographic markets”
NEWP, established in 1992, operates three wood pellet facilities with a combined annual production capacity of 240,000 tons. The facilities are strategically located in the U.S. Northeast, which is the largest domestic market for consumption of wood pellets for heating. NEWP generated EBITDA of approximately $7.4 million in 2013. Further explanation of EBITDA, a non-GAAP financial measure, and a reconciliation of NEWP’s EBITDA to operating income have been included below in this press release.
“NEWP is the leader in the growing U.S. market for wood pellets used in heating applications. The acquisition brings additional cash flows and profitability to our wood fibre business. In addition, NEWP’s business broadens our product offerings, customer base and geographic markets,” said D. Hunt Ramsbottom, president and chief executive officer of Rentech.
NEWP is the leader in a well-established and growing market
Known for its high quality products, NEWP commands an approximate 15% share of the market for heating pellets in the U.S. Northeast. The company is one of the largest suppliers of wood pellets to major retailers including Home Depot, Lowe’s, Tractor Supply and Wal-Mart.
Wood pellets burned in modern heating appliances are a clean and convenient source of economical heating. Prices for wood pellets are competitive with delivered retail prices for natural gas, and lower than prices for heating oil, propane, or electricity. Wood pellet prices have historically been more stable than prices of heating oil or natural gas. Low population density in NEWP’s markets makes the distribution of natural gas inefficient and expensive.
Approximately 1.5 million tons of wood pellets are consumed annually in the U.S. Northeast. According to independent forecasts, wood pellet consumption in the region is expected to increase at an annual growth rate of 7% through 2018. Customer demand for wood pellets in this market exceeds available regional production.
NEWP diversifies Rentech’s wood pellet business
By providing access to the domestic heating market, the acquisition broadens Rentech’s wood pellet product offerings, expands its customer base, and opens up new geographic markets.
NEWP has a strong financial profile
The acquisition is immediately accretive to Rentech’s wood fibre processing business. Consistent with its 2013 performance, NEWP’s business is forecasted to have revenues of approximately $44.8 million, operating income of approximately $4.6 million and EBITDA of approximately $7.6 million for the twelve months ending December 31, 2014. A reconciliation of forecasted EBITDA to operating income for NEWP is included below.
Financial Highlights of the Acquisition
Rentech acquired all of the equity interests of NEWP for $34.5 million in cash, funded from proceeds of Blackstone/GSO’s recent $150 million investment in Rentech. Rentech will assume NEWP’s cash of $2.4 million and debt of approximately $13 million, for a total initial purchase price of $45.1 million. The initial acquisition price equals 6.1 times NEWP’s 2013 EBITDA. Rentech expects an after-tax return on the acquisition in the mid-teens.
The purchase agreement provides for up to $5 million of potential earn-out consideration, to be paid in cash to the sellers. The earn-out consideration would be earned ratably if NEWP’s 2014 EBITDA, as defined in the purchase agreement, is between $7.3 million and $8.0 million. The earn-out consideration would not increase if NEWP’s 2014 EBITDA were to exceed $8 million.
Disclosure Regarding Non-GAAP Financial Measures
EBITDA is defined as operating income plus depreciation expense. EBITDA is used as a supplemental financial measure by management and by external users of Rentech’s financial statements, such as investors and commercial banks, to assess:
- The financial performance of Rentech’s assets without regard to financing methods, capital structure or historical cost basis; and
- Rentech’s operating performance and return on invested capital compared to those of other companies, without regard to financing methods and capital structure.
EBITDA should not be considered an alternative to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA may have material limitations as a performance measure because it excludes items that are necessary elements of Rentech’s costs and operations. In addition, EBITDA presented by other companies may not be comparable to Rentech’s presentation, since each company may define these terms differently.
The table below reconciles NEWP’s 2013 EBITDA to operating income for the twelve months ended December 31, 2013. The table also reconciles NEWP’s forecasted EBITDA to operating income for the twelve months ending December 31, 2014.
|(in millions of dollars)|
|Plus: Depreciation & Amortization||$||3.0||$||3.0|
1In 2014, Rentech will recognize EBITDA from the date of the acquisition through December 31, 2014.