This morning Tessenderlo Group (TESB BB) and Picanol Group (PIC BB), two Belgian industrial companies,  announced their plans to combine the industrial activities of both companies into one larger industrial group, Picanol Tessenderlo Group NV. The deal involves the transfer of the current industrial activities of Picanol into Tessenderlo.

Deal basically transfers all of Picanol’s industrial activities to Tessenderlo Chemie, where Picanol would in return would end up owning about 57% of  New Tessenderlo Chemie (and given Luc Tack who is both Picanol’s and Tessenderlo’s CEO and about 90% shareholder in Picanol, his intentions are not aligned with Tessenderlo’s minority shareholders and has convinced the ”independent’ Tessenderlo board to give him majority control based  on  what we consider flawed ‘independent’  DCF valuations for old Picanol and old Tessenderlo). 

Based on the merger operation’s numbers, Picanol and Luc Tack are disproportionately benefiting  from this operation, without showing a great industrial rationale for a tie up (with no real synergies): high valuation obtained for disposed Picanol operations, potential larger share price upside of Picanol vs Tessenderlo, obtaining majority control with no real control premium being paid. Unfortunately due to very limited liquidity in Picanol, nothing to be done.

New pro-forma companies: 

1) New Tessenderlo Chemie (to be called Picanol Tessenderlo Group NV):

Industrial activities generating 2014 REBITDA of about EUR 201 (from company presentation: EUR 134m for Tessenderlo continued businesses and EUR 67m for Picanol) – however no more recent/updated numbers)

Pro-forma net debt of about EUR 105m (30 Jun 2015 Debt of EUR 247.1m – Cash and Cash equivalents of EUR 142.5m)

Outstanding shares: 68.62m shares

2) New Picanol (to be called Picanobel NV):

No industrial activities

38.56m New Tessenderlo Chemie shares (old ownership of 12.8 + 25.76 shares to Picanol)

Net cash balance of EUR 49.8m

Outstanding shares: 17.7m shares

Target price calculations:

Based on the above values and assets, New Picanol value will be entirely driven by New Tessenderlo valuation, assuming respective 8x, 9x and 10x 2015 EV/REBITDA valuation (and assuming 10% REBITDA growth to about EUR 220m for 2015) for New Tessenderlo (press release references blended multiple of about 9.5x), New Tessenderlo target share prices would be respectively about EUR 24.1, EUR 27.3 and EUR 30.5 (vs pre-deal trading price of EUR 26.8).

Applying above New Tessenderlo share price valuations (without applying any holding discount for this monoholding structure), would imply respective New Picanol share prices of about EUR 55, EUR 62 and EUR 69 (vs pre-deal trading price of EUR 53).