Rentech, Inc. (NYSE MKT: RTK) has announced the acquisition of Georgia-based Fulghum Fibres, Inc. (Fulghum Fibres) and the acquisition of two facilities for conversion to the production of wood pellets in Ontario, Canada, along with contracts for the sale and transport of more than four million metric tons of wood pellets over ten years. These steps position Rentech to develop a world class wood processing business for production of high-quality wood chips and pellets. Rentech expects these investments to be funded from cash on hand, expected distributions from Rentech Nitrogen, and investments from a joint venture partner. Rentech will host a conference call today at 7:00 a.m. PDT to review additional details regarding today’s announcements as disclosed in its investor presentation posted on its website.
“Today’s announcements launch us into the wood fibre and pellet supply business, with immediate cash flow and significant growth opportunities, and allow us to take advantage of our fibre relationship in the Province of Ontario”
Fulghum Fibres is expected to have approximately $10 million of operating income and $20 million of EBITDA in calendar year 2013, consistent with its stable financial history. The net purchase price, including assumed debt, is $112 million. The company, founded nearly 25 years ago, has been consistently profitable and maintains a solid reputation as a producer of high quality wood chips and other services to a diversified customer base in the pulp and paper industries in the U.S., South America and Asia. The acquisition provides Rentech with immediate stable cash flow with growth opportunities, and a platform to launch into the growing and complementary global wood pellet industry. The acquisition also brings with it a joint venture with Graanul Invest, a large European producer of pellets, for the development and construction of pellet plants in the U.S. and Canada.
Take-or-pay contracts are in place with two utilities to supply a combined total of 445,000 metric tons of wood pellets annually over ten years. To supply the pellets, Rentech plans to convert two decommissioned wood fibre mills in Eastern Canada into pellet mills that will employ a total of approximately 65 full-time employees and help to create jobs for construction and wood supply from sustainable Crown forests in Ontario. These two facilities are expected to generate $3 million of operating income and $15 million of EBITDA when fully operational, with combined total project cost estimated at $70 million. Rentech has contracted for the handling and transport of the pellets. The two plants would make Rentech the largest producer of industrial wood pellets utilizing fibre from Eastern Canada, a source of supply that is highly desired due to its location and wood quality.
“Today’s announcements launch us into the wood fibre and pellet supply business, with immediate cash flow and significant growth opportunities, and allow us to take advantage of our fibre relationship in the Province of Ontario,” said D. Hunt Ramsbottom, President and Chief Executive Officer of Rentech. “Fulghum Fibres provides immediate and steady EBITDA and nearly 25 years of fibre processing expertise that we can leverage for successful execution in the wood pellet industry.” Mr. Ramsbottom continued, “The wood chip and pellet industries, which qualify for an MLP structure, are growth sectors with long-term contracts that should provide stable margins and attractive returns on project investments. With sustainable fibre supply from Crown forests, Rentech will continue to pursue First Nations partnerships and opportunities for economic development associated with our Ontario projects. With our long-term customer contracts, processing expertise, and logistics in place, Rentech is positioned to execute on our objective to be a leader in the rapidly growing global market for wood pellet production.”
Mr. Ramsbottom added, “We expect these new businesses to have stable cash flows. The pellet facilities are structured around sustainably managed long-term fibre supplies and long-term off-take and logistics contracts. Fulghum Fibres’ chip processing business is primarily a fee-based service. The stability of margins we expect here will reduce our consolidated exposure to agricultural cycles inherent in Rentech Nitrogen’s business. We believe this diversification and pricing stability creates a stronger and more valuable entity at Rentech in the short, medium and long term.”
Based in Augusta, Georgia, Fulghum Fibres has approximately 420 employees and is a leader in contract fibre processing services. Fulghum Fibres, which was established in 1989, processes approximately 15 million metric tons of wood and bark annually into wood chips and residual fuels at its 32 wood chipping mills, 26 of which are located in the U.S. and 6 of which are located in South America, where Fulghum Fibres provides chipping services and exports wood chips to customers who are primarily in Japan. Fulghum Fibres operates primarily under long-term contracts and services a portfolio of industry-leading customers such as Georgia Pacific, International Paper and Weyerhaeuser.
Revenues are typically based on per-ton processing fees with minimum volume requirements. Fulghum Fibres commands an estimated 70% of the U.S. contract chipping business and approximately 6% of the total U.S. chipping market that includes in-house chipping operations by large pulp and paper companies. In the U.S., the majority of Fulghum Fibres’ wood chip production is destined for products with the highest expected growth in the pulp and paper market, such as containerboard, boxboard, and tissue.
The senior management team of Fulghum Fibres has signed employment agreements, and is expected to remain in place for the foreseeable future. Fulghum Industries, which manufactures wood handling and chipping equipment and has been under common ownership with Fulghum Fibres, is not being acquired, but will continue to supply equipment and expertise to Fulghum Fibres on favorable terms.
Fulghum Fibres Transaction Highlights
Rentech will acquire all of the equity interests of Fulghum Fibres for $60 million, to be paid from cash on hand. Rentech will acquire approximately $10 million of cash, repay $3 million of debt, and assume approximately $59 million of Fulghum Fibres’ debt, for a total net purchase price of $112 million. The acquisition price equates to 5.6 times 2013 forecasted EBITDA for Fulghum Fibres’ business.
Fulghum Fibres is forecasted to have revenues of approximately $95 million, operating income of approximately $10 million and EBITDA of approximately $20 million in calendar year 2013, which are consistent with Fulghum Fibres’ stable historical financial performance. Further explanation of EBITDA, a non-GAAP financial measure, and a reconciliation of Fulghum Fibres’ forecasted EBITDA to operating income have been included below in this news release.
Fulghum Fibres as Platform for Pellet Business
Fulghum Fibres provides Rentech with a stable operating and financial platform with inherent growth opportunities within the sector. The Company intends to use this platform to launch into the complementary, growing wood pellet industry, a natural extension of chip production. Fulghum Fibres brings operating and processing expertise to the front end of the Company’s wood pellet business, as each pellet mill requires wood handling and production of chips. Fulghum Fibres also brings a joint venture with Graanul Invest, a European company that is one of the largest pellet producers in the world, to develop and construct pellet projects in the U.S. and Canada.
Entry into the Wood Pellet Supply Industry
Global demand for wood pellets is projected to triple by 2020, to 50 million metric tons. Rentech has secured the key elements to quickly become an industrial scale supplier of wood pellets from Eastern Canada to the Canadian and European utility markets with:
- Deep experience in wood handling and production of chips with the acquisition of Fulghum Fibres,
- A joint venture for development, construction, and investment in the U.S. and Canada with a major European producer of pellets,
- Two take-or-pay ten-year off-take contracts for combined pellet deliveries averaging 445,000 metric tons annually,
- Two decommissioned facilities in Ontario, Canada for conversion to pellet production,
- Exclusive priority access to the only large scale pellet handling facility in Eastern Canada through a 15-year agreement with Quebec Stevedoring Company Limited (Quebec Stevedoring), which provides deep water access at the Port of Quebec and short shipping distance to European pellet consumers,
- A strategic relationship with Canadian National Railway Company (CN) (TSX: CNR) (NYSE:CNI) for the inland transportation of pellets to the port,
- Job creation, including new employment opportunities for First Nations,
- Sustainably managed fibre supply from Ontario Crown forests, and
- In-house management expertise in forestry and pellet supply.
Contracts to Supply Pellets
Two ten-year take-or-pay contracts are in place for the sale of industrial wood pellets totaling over four million metric tons of production over the life of the contracts.
Drax Power Limited (Drax)
Drax has signed a ten-year off-take contract for the delivery of approximately 400,000 metric tons of pellets annually to be supplied by Rentech’s Wawa and Atikokan facilities (see below), with prices indexed for inflation, fuel and fibre supply costs. The contract establishes a strategic relationship with Drax, which plans to invest approxim