Scapa Group agrees £403m approach from US suitor

US engineering specialist Schweitzer-Mauduit International Inc (SWM) said it has reached agreement to buy Manchester-based wound care Scapa Group in a £403m deal.

The acquisition is expected to be completed in the second quarter of this year.

SWM chief executive, Dr 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.”

He added: “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-recognised brand portfolio.”

Heejae Chae, Scapa chief executive, said: “The Scapa team has worked tirelessly to build our brand to be globally recognised 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.”

He said: “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.”

In November last year Scapa revealed that interims revenues declined 24.1% to £122m in the six months to September 30, and it recorded a pre-tax loss for the six month period of £500,000, compared with a pre-tax profit of £1m the previous year.

Russ Mould, investment director at Manchester investment platform AJ Bell, said: “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.

“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).

“Admittedly, three approaches have been rebuffed and failed, perhaps knocking a bit of a hole in the value argument. However, three of those offers featured at least some element of stock and not just cash, whereas the all-cash offers have had a warmer reception.

Russ Mould

“Perhaps the failure of those all-stock or part-stock bids showed that investors had doubts over the valuation of the paper they would, or have, received, or simply felt keeping the shares in the UK-based target offered greater upside potential.

“The recommended bid for Scapa does, at least, vindicate the judgement of those investors who backed last May’s £33m 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.”

He added: “This is a further example of Benjamin Graham’s adage that ‘The intelligent investor is a realist who sells to optimists and buys from pessimists’ – something which those currently involved in ramping Gamestop’s shares might need to bear in mind as well.”