Description

TIS will likely be in bankruptcy within a month, or any day now, as it sells itself for less than the debt.   At $50M market cap, it is not large but the options are surprisingly liquid for such a small name, and IB has had shares to borrow at reasonable rates.

Optically cheap at a 0.36 P/BV, and with sole sell side analyst saying forward P/E is <5x, the stock is mostly held by sleepy mutual funds where this is a tiny position, and individual investors.

Prelude:

After constantly missing financial targets and amending covenants, the lending consortium made the 8th (!) amendment which required TIS put itself up for sale in April.  One can imagine the frustration of having to lend more money down a seemingly black hole, and the desire to just get out after one miss after the other.

Sale confirmation:

All signs point to the sale going through, as one of the 2 analysts covering the stock (Taglich) who likely was holding on for potential banking fees, dropped coverage in May even though they sit on the Board and own(ed) 1% of the stock.

Also, TIS has not yet announced a QTR earnings call when they usually were prompt, and the two times they weren´t prompt the company had news which dropped the stock 50%.

Market dynamics:

The fundamentals are going to get worse – while the company makes little money today requiring more bank financing, competitors Sofidel and CLW are building new plants near each of TIS´s two plants, with expected openings in 1-2 years. The industry has seen a surge of new capacity and capacity utilization is not expected to get tight in the foreseeable future.  Read CLW´s most recent QTR.

Valuation:

The question is what the sale will bring – will it cover the debt at (PF) $180M?  I think earnings to an acquirer which can reduce G&A would be $12M EBIT give or take a few $M.  At 11-12x industry EBIT multiples, let´s say its $130M, and add in $25M for net WC so $155M.  As an aside, competitor CLW said they target 11% ROIC for new plants.

Bull case:

Net PP&E is $282M.  I think that is overstated because the new plant Barnwell was over budget by $40M now due to cost overruns and delayed startup costs, while the other plant has been 30% idle even in the prior upturn. But I would not argue that PP&E adjusted for these items is over $200M.

However, PP&E <> value.  Besides competitors building new plants nearby so sales growth will be tough for years, the new Barnwell plant which is maybe 60% of adjusted PP&E is a QRT machine, which as far as I can tell has just one customer worldwide – TIS.  QRT is produced by Valmet who is #1 worldwide in making tissue machines. The competitors building nearby TIS plants will use Valmet machines (Sofidel has 15 Valmet tissue machines).  When everyone (GP, Sofidel, CLW, etc) are choosing different Valmet machines, it says something.

Also, as far as PP&E, remember that buying and moving the plant is not quite cost prohibitive but a majority of the costs are not the machines but rather facility modifications, setup, and startup costs.

Risks are two fold:

1)   Someone overpays.  Always a risk, but CLW just announced the QTR and didn´t seem to be a bidder, while Sofidel is looking at European tissue assets for sale so not sure what their capacity is. 

2)   No bids or bids so small the lenders balk.  There are at least half a dozen of players that could buy,  but not sure how to handicap what the lenders are thinking.  However if the lenders wanted to keep going, I would think TIS would be scheduling a conference call by now.

How this plays out:  To avoid a shareholder vote, will need to be a Section 383 bankruptcy filing.  Since contracts signed pre BK would be invalid, a buyer wanting TIS would need to negotiate the purchase agreement and then TIS files, the judge then ratifies the contract as a stalking horse bid, and then for two months or so there is another sales process.  Which means the stock will likely decline a lot with the BK filing, but won´t be a zero right away.   But given the long investors will sell post BK its safe to say the stock will be down a lot.

Timing:  Per the 8-K, the signed purchase agreement was due July 31^st.  When I look at the timing closely, I think it was doable but aggressive, so not sure we can pin down a specific day as surely if the buyer needed a little more time the lenders would accomodate.  I would say “soon”.

Catalyst

Sale announced within days or weeks