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Jax Daily Record Monday, Jun. 5, 201712:00 PM EST

Merger diversifies Rayonier's business

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by: Mark Basch Contributing Writer

On the surface, Rayonier Advanced Materials Inc.’s merger with Tembec Inc. looks to be all about size and space.

The merger of the two cellulose specialty products companies more than doubles Rayonier AM’s size to $2 billion in annual revenue, and expands its geographic reach to markets in Canada and France.

However, analysts who follow Jacksonville-based Rayonier AM point out the $807 million deal announced before Memorial Day weekend also will significantly diversify the company’s product mix.

Rayonier and Montreal-based Tembec produce very different products within the cellulose fibers industry.

“Tembec has a solid position in the high alpha dissolving pulp (HADP) market, especially with customers in the ethers (thickening agents) arena. By contrast, Rayonier AM’s dominant emphasis in the HADP market has been in acetate tow, which is used mainly in the production of cigarette filters,” Vertical Research Partners analyst Chip Dillon said in a research report.

“The outlook for ethers is much better than the outlook for acetate tow, and we believe Tembec can aid Rayonier AM in transitioning more of its HADP (or cellulose specialties) capacity into ethers as the acetate tow market likely continues to struggle,” he said.

According to Rayonier AM’s annual report, about 55 percent of its sales in the last three years were from acetate tow used to make cigarette filters. The cigarette industry is not the most attractive sector for investors.

“The diversification created by the transaction de-risks the Rayonier AM portfolio and re-positions the company in growing end-markets (as opposed to the declining cigarette industry). Therefore, we would expect investors to place a greater value on the pro-forma entity,” RBC Capital Markets analyst Paul Quinn said in his research note.

“It simply makes sense, since Rayonier AM has a strong presence in acetate (but little in ethers) and Tembec is the opposite. Rayonier AM has recently been focused on growing in ethers as acetate growth has plateaued, and Tembec’s exposure should propel the initiative,” D.A. Davidson analyst Steven Chercover said in his note.

Tembec also has product lines beyond cellulose specialties, including lumber, paperboard and newsprint.

“In buying Tembec, Rayonier is catapulting itself into business lines that are far from the core ‘specialty cellulose’ business,” Chercover said.

“Rayonier was in lumber not long ago, and has a long history in pulp, and from an operational perspective, bleached board and newsprint don’t scare us (but they don’t excite us either),” he said.

“All of the businesses are cash flow positive (paper pulp endured a small 2016 operating loss), so our biggest source of concern from the ‘new’ business lines are ‘perceptual’ – exposure to declining businesses and/or margin dilution.”

Rayonier AM has had a perceptual problem on Wall Street since it split up with timber and real estate company Rayonier Inc. three years ago. A string of disappointing earnings reports in the quarters after the split sent its stock tumbling, and it has not recovered.

The stock did rise from $13.25 when the deal was announced May 25 to a two-year high of $17.60 last week.

Chercover maintained a “buy” rating on the stock with a $22 price target after the merger was announced.

“We suspect that this deal was a long time in coming and will pay off when completed,” he said.

Quinn maintained an “outperform” rating and raised his price target from $16 to $20.

“We believe the go-forward entity has considerable opportunities in the specialty cellulose market, which justifies our rating,” he said.

Dillon raised his rating from “hold” to “buy” but after the stock came close to his $18 target, he downgraded it back to “hold” on Thursday.

Web.com stock up on reports

The other big news to break before the holiday weekend was a Reuters news service report that private equity firms have approached Web.com Group Inc. about a possible buyout.

The report did, however, state there was no certainty that a deal would ultimately come about.

Jacksonville-based Web.com, which provides website development services for businesses, rose modestly from $21.20 when the Reuters story surfaced May 25 to an 18-month high of $23.65 last week.

“While there has been nothing to substantiate the media reports, we speculate if Web.com was to put itself up for sale there could be considerable amount of value unlocked for shareholders,” BWS Financial analyst Hamed Khorsand said in a research report.

“A takeout value for Web.com could be in excess of $30 with us eyeing $34 as fair value,” he said.

Khorsand said another company already in the same business might make more sense as a merger partner for Web.com, as opposed to a private equity buyer.

“Web.com operates in a higher end of the web hosting and domain business by attracting small business owners to use services to grow their presence online, like local search and social media presence. We believe this set of tools would be easier to acquire for a strategic buyer versus starting from scratch,” he said.

A strategic buyer would have an opportunity to cut costs in a merger, but a private equity firm “might not be able to extract the same value” from a deal, he said.

Khorsand said Web.com’s stock could fall back after the initial bump from the Reuters story.

“However, we believe there is considerable value in Web.com with or without a deal where we would remain buyers of the stock, especially if there was a dip in the stock price,” he said.

TapImmune tests continue

TapImmune Inc. still has no revenue to report, but the company is getting closer with several therapies under development, CEO Glynn Wilson said in a quarterly update last week.

TapImmune is developing immunotherapies — treatments that stimulate a person’s immune system — to fight cancer.

Wilson said the company expects to have four active phase 2 studies in progress by the end of this year, including studies at the Mayo Clinic in Jacksonville.

The company moved its headquarters office to Jacksonville two years ago because of its clinical trials at the Mayo Clinic.

“Based on the breadth of our pipeline, we believe TapImmune is the only immune-oncology company of our size that is poised to generate such substantial value through the continued development of our novel vaccine candidates. We look forward to advancing our extensive pipeline and to translating our anticipated clinical milestones in to multiple value inflection points for our shareholders,” Wilson said in a news release.

TapImmune’s stock began listing on the Nasdaq Capital Market last fall, prompting the company to hold regular conference calls to update investors on its progress.

The company reported a net loss of $2.4 million, or 29 cents a share, in the first quarter.

Shoe Carnival results fall

Shoe Carnival Inc. reported a drop in sales and earnings for its first quarter ended April 29.

Net sales fell 2.7 percent to $253.4 million and comparable-store sales (sales at stores open for more than one year) fell 3.9 percent.

The footwear chain controlled by former Jacksonville Jaguars owner Wayne Weaver reported earnings of 48 cents a share for the quarter, 8 cents lower than last year.

“While February was a very challenging month due to the delay in the tax refunds, we are encouraged by the improvement in our sales as we progressed through the quarter.

Comparable store sales for March and April combined, which includes the shift in the Easter selling season, were up low single digits,” CEO Cliff Sifford said in a news release.

Weaver is chairman of the Evansville, Ind.-based chain of 418 stores. He and his wife, Delores, control 28.6 percent of the company’s stock.

Medtronic ENT sales rise

Medtronic plc said sales in its Jacksonville division — which produces surgical instruments for ear, nose and throat doctors — rose in the “low single digits” in its fourth quarter ended April 28. However, as usual, it did not provide numbers.

The company said its entire special therapies division increased revenue by 7 percent to $396 million, but the ENT business had the lowest sales growth of the three businesses in the division.

Medtronic’s total revenue for the quarter rose 5 percent to $7.9 billion, with adjusted earnings rising by 6 cents a share to $1.33.

The global medical products company said it expects earnings per share growth of 9 percent to 10 percent in fiscal 2018, but foreign exchange rates could negatively impact earnings.

Acosta expands into Canada

Jacksonville-based Acosta expanded into Canada by acquiring Summit Marketing Canada.

British Columbia-based Summit is a food manufacturer sales agency that serves manufacturers and products in Western Canada.

Acosta provides sales and marketing services for more than a half-million foodservice companies across the U.S.

Terms of the deal were not announced.

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