Orchids Paper Products Company (TIS) sealed the partnership deal with Fabrica de Papel San Francisco, S.A. de C.V., a leading tissue manufacturer in Mexico, previously announced on May 5. The transaction, subject to customary closing conditions, is being funded with a new term loan and a credit agreement with the U.S. Bank National Association.
Under the agreement, Orchids Paper paid Fabrica a sum of $36.7 million, with $20 million through shares of Orchids’ common stock and the remaining in cash. The agreement will allow Orchids Paper to establish a strategic foothold in the western U.S.
Strategic Alliance
Orchids Paper, an integrated manufacturer of tissue paper products, has acquired Fabrica's current business in the U.S., thereby getting access to an annual capacity of 18,000 metric tons in order to meet consumer demand in the value, premium and ultra-premium segments in the U.S. market. The alliance also carries an option wherein Orchids Paper can further buy 7,000 metric tons in each of the first 2 years.
The production of tissue products will be carried out at Fabrica's facility in Mexicali, Mexico and then shipped directly to the U.S. customers. Further, Fabrica has agreed to sign a non-compete agreement in the U.S. and grant an exclusive license to Orchids Paper for using some of its trademarks in the country.
Synergies
Orchids Paper’s association with Fabrica will help it achieve the goal of becoming a national leader in the value, premium and ultra-premium tiers of the consumer tissue market. The deal will permit Orchids Paper to operate in the lucrative Mexican market that was previously unfeasible due to cost challenges.
The use of Fabrica’s manufacturing facilities will allow Orchids Paper to cater to the existing customer base as well as new clients in a cost-effective manner. Also, the alliance is expected to generate similar operating margins as earned from the products presently manufactured in Orchids' Oklahoma facility.
Orchids Paper seems well placed to capitalize on this expansion opportunity and create long-term value for shareholders.
Orchids Paper presently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the Basic Materials sector include Agnico Eagle Mines Limited (AEM), Kumba Iron Ore Ltd. (KIROY) and Compass Minerals International Inc. (CMP), all of which sport a Zacks Rank #1 (Strong Buy).
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