US firm SWM agrees £403m deal to buy Scapa

US resins firm Schweitzer-Mauduit International, Inc. (SWM) said on Wednesday it reached an agreement with the board of Ashton-under-Lyne-based wound care and industrial firm Scapa Group on the terms of a £402.9 million recommended cash offer to acquire Scapa.

“Pursuant to the terms of the offer, Scapa’s shareholders will be entitled to receive 210 pence in cash for each Scheme Share,” said SWM.

“Based on Scapa’s closing share price of £1.77 and the exchange rate of US$1.37:£1 on January 26, 2021, the transaction implies an equity value of approximately £402.9 million, or $551.9 million.

“The transaction is anticipated to be completed in the second quarter of calendar 2021.”

However, Scapa shares soared about 25% on the news to around 221p, suggesting it might take a higher offer to secure the deal.

“Those investors who stuck with adhesives and bonding specialist Scapa through the early stages of the pandemic and backed last May’s fund raising at 105p could be about to double their money, thanks to a 210p-a-share cash bid from American resins expert Schweitzer-Mauduit,” said Russ Mould, AJ Bell Investment Director.

“Scapa’s board is recommending the offer although the shares are trading higher still, to perhaps suggest shareholders may look to hold out for a little more from the would-be buyer, or even a counter-offer from another company.

“After all, Scapa’s shares were trading at 272p just prior to last February’s profit warning and the shares peaked at 516p in June 2017.

“The bid may provide succour to bulls of UK equities more generally, as well as Scapa’s shareholders.

“Schweitzer-Mauduit is the latest trade or financial buyer to launch a bid for a publicly-owned company, to suggest that there could be some value to be had from the UK stock market.

“The UK has consistently underperformed on the global stage since June 2016’s Brexit vote and sterling has failed to regain the levels at which it traded before Britain decide to leave the EU.

“That combination may mean that some assets are going cheap and the average bid premium of 45% across the 20 or so takeover offers made for UK firms since the autumn would support that view – even if Schweitzer-Mauduit’s bid represents only a 19% premium to Scapa’s pre-offer price (and CFE is trying to buy CIP Merchant Capital at a sizeable discount to net asset value today) …

“The recommended bid for Scapa does at least vindicate the judgement of those investors who backed last May’s £33 million fund raising during the first wave of the pandemic and just three months after a profit warning.

“The potential profits enjoyed by those shareholders also reaffirm the importance of valuation when it comes to assessing a stock, despite what some might tell you as the current equity bull market roars onwards, especially in the USA, where the surge in Gamestop stock continues to make waves.

“When Scapa’s shares peaked at north of 500p, investors were paying 27 times forward earnings for the company (which ultimately achieved earnings per share of 18.9p the following year).

“That suggests investors mistook perceived stability and reliability of earnings for safety and overpaid for the privilege, especially as profits ultimately disappointed and sagged.

“Yet anyone who snapped up the placing shares at 105p was effectively paying barely seven times past peak earnings (adjusting that 18.9p EPS number to 15.6p to account for the increased share count).

“While there is no guarantee that Scapa’s profits will return to their previous highs – analysts are forecast 12p in EPS for the years to March 2022 and 2023 –  paying such a lowly multiple means that the investor is less of a hostage to fortune, has more downside protection it they do not and more upside if they do get back to where they came from.”

SWM CEO Jeffrey Kramer said: “We are very excited to announce our proposed acquisition of Scapa, which significantly enhances our position as a leading provider of performance materials for attractive specialty applications.

“Scapa advances our successful valued-added solutions strategy and enhances our ability to solve our customers’ toughest innovation challenges by adding a fully integrated model with complementary capabilities.

“These offerings range from adhesive formulations and product design through converting finished products.

“This transaction also enhances our growth profile, with nearly 65% of our combined revenues generated from growing end-markets.

“We are enthusiastic about adding Scapa’s best-in-class global healthcare solutions platform to our already substantial presence, giving SWM immediate critical mass in the growing medical materials space.

“Together with Scapa, we will offer a comprehensive suite of products focused on skin-friendly specialty applications like advanced woundcare, wellness, and medical device fixation, in addition to our existing portfolio of medical products.

“Scapa also brings a robust and profitable set of industrial tapes used in construction, transportation, consumer, and industrial end-markets, complementing our existing business.

“Like SWM, Scapa has significant capabilities and scale in key specialty applications and a well-recognized brand portfolio.

“With Scapa’s industrial business as part of SWM’s diversified AMS segment, we see potential to leverage our combined sales and distribution reach.”

Scapa CEO Heejae Chae said: “The Scapa team has worked tirelessly to build our brand to be globally recognized as an innovative, solutions-driven partner for outsourced product development and manufacture.

“The expansion into healthcare markets, from our initial focus on the industrials space, has significantly broadened our reach and has brought new strategic partnerships, many of which are with blue-chip companies.

“As another multinational producer for outsourced performance materials, SWM has been on a similar journey to us, also extending into healthcare markets having initially been focused on customers in the industrials sector.

“We believe the combination of our complementary businesses will bring benefits to all stakeholders.

“We see these not only resulting from increased scale, but also from an increased ability to cross-sell products across our respective client bases, as well as an increased potential to enhance inorganic growth from within a larger group.

“We believe the enlarged business will also provide greater career development opportunities for employees.”