Yule Catto delivers an acquisition masterclass.
All too often, big acquisitions can go badly wrong, failing to deliver the expected benefits or burdening previously healthy companies with unmanageable levels of debt.
Despite these risks, companies can benefit hugely from well-judged acquisitions. FTSE 250 chemical company Yule Catto & Co (LSE: YULC) acquired the German company PolymerLatex at the start of 2011, and has since demonstrated just how well an acquisition can work.
The £386m purchase of PolymerLatex was funded by a rights issue and additional debt, and has enabled Yule Catto to virtually double its turnover and profit in one year, boosting revenue by 92% and underlying profit before tax by 99%.
A successful transition
Since 2007, Yule Catto has been transforming itself from a small, diversified chemical company into a much larger polymer specialist.
It has disposed of non-core businesses, like its pharmaceutical concern, and acquired PolymerLatex plus several small businesses in order to increase its product strength and capacity in its core polymer market.
Pro-forma delights
Yule Catto's revenue rose by 92% to £1,117m in 2011, while operating profit rose by 91% from £50.4m to £96.4m. Underlying earnings per share rose by 30% from 14.5p to 18.8p; the relatively modest size of this increase is due to the dilutive effect of the rights issue used to fund the PolymerLatex purchase.
Looked at on a pro-forma basis -- as if Yule Catto owned PolymerLatex in 2010 -- revenue rose by a still-impressive 18% and underlying profit before tax rose by 25%.
Yule Catto's net debt was £164m at the end of 2011, although the company was keen to point out that it had already reduced its debt by £70m since the acquisition closed in March 2011. This puts net debt at 1.2 times EBITDA, a fairly acceptable level.
The only fly in the ointment was the disclosure that the 18% pro-forma increase in revenue masked a 3% decline in sales volumes. The increase in sales value was entirely due to the recovery of increased raw material prices from customers.
Growth story or grown up?
Whatever your reasons for buying Yule Catto, income won't be one of them. Despite a 35% increase in the full-year dividend to 3.5p, Yule still only yields about 1.6% -- a fairly paltry offering.
The main attraction of Yule Catto is growth. It is strongly focused on geographic expansion, especially in Asian and other emerging markets, which performed strongly in 2011, delivering a 29% increase in pro-forma operating profit.
The company has a new factory coming on stream in Malaysia in Q4 2012, and I believe that it will find customers for this extra output -- albeit growth could slow in the years to come.
> Get the latest on investing and the markets, direct from the desk of David Kuo. You'll also receive a special free report on '10 Steps To Making A Million' if you join The Motley Fool Collective today.
More from Roland Head:
