Orchids Paper Enters Strategic Alliance with Fabrica de Papel San Francisco

Orchids Paper Products Co., Pryor, Okla., USA, this week announced a strategic alliance with Fabrica de Papel San Francisco, S.A. de C.V. to support the growth of Orchids' U.S. west coast sales.  Fabrica, which is based in Mexicali, Baja California, Mexico, is a producer of high quality tissue paper products. Orchids expects that this alliance will allow it to effectively and efficiently service customers in the western U.S. and support Orchids' vision to become a national supplier of high-quality consumer tissue products in the value, premium, and ultra-premium tier markets.

 

Fabrica is a privately owned business that started as a tissue converter in 1958 and has grown to 150,000 metric tons of capacity, one of the largest tissue manufacturers by capacity in Mexico. In 2013, Fabrica started up the world's first NTT paper machine.

 

As part of this alliance, Orchids will acquire Fabrica's current U.S. business, including certain manufacturing assets and access to 18,000 metric tons of capacity each year to support the value, premium, and ultra-premium requirements of the U.S. market, with an option to purchase an additional 7,000 metric tons in each of the first two years. Products will be produced at Fabrica's facility in Mexicali, Mexico, and shipped directly to Orchids' U.S. customers. Operating margins on products produced under this agreement are expected to be consistent with margins earned on products produced in Orchids' facility in Oklahoma. Additionally, Orchids will receive a non-compete in the U.S. from Fabrica as well as an exclusive license to use certain of Fabrica's trademarks in the U.S.

 

Orchids will pay an aggregate of $36.7 million under various agreements, including shares of Orchids common stock having a value of $20 million and cash of $16.7 million, which Orchids expects to fund with a new term loan.

 

Under the terms of the alliance, Orchids will nominate Mario Armando Garcia Franco, president and director of Fabrica, or other such person designated by Fabrica, for election as a member of the Orchids Board of Directors following closing of the transaction. More details of the alliance are available in Orchids' Form 8-K, which was filed this week and is available on Orchids' website.

 

The expected strategic and financial benefits of the transactions to Orchids are as follows:

• Ability to cost effectively service new and existing customers and distribution centers in the western U.S.
• Assumption of Fabrica's current U.S. business (Fabrica's unaudited U.S. sales totaled approximately $25.8 million in 2013 and $8.0 million in Q1 2014, and EBITDA was approximately $5.1 million in 2013 and $2.0 million in Q1 2014)
• Implementation of best practices to improve quality and reduce costs across both companies
• Immediate accretion to earnings per share.

"We are extremely pleased to begin a long-term partnership with Fabrica," said Jeffrey Schoen, president and CEO of Orchids. "Mario Armando Garcia Franco, the president and director of Fabrica, is a 40-year veteran in this space and has built one of the largest tissue manufacturing operations in Mexico. His team is truly world-class. During the past year, I have been able to develop a strong relationship with Mario and his team and believe our goals and vision are aligned. We believe our alliance with Fabrica will allow us to cost effectively provide high-quality products and superior customer service to a portion of the market that was previously difficult to access due to cost challenges. We look forward to pursuing additional opportunities with Fabrica."

 

The alliance has been unanimously approved by the Orchids Board of Directors and the owners of Fabrica and is expected to close in the second quarter of this year, following satisfactory completion of customary closing conditions.