Primary Preview: Armor-IIMAK Market Leadership, OEM Ties, Cash Generation Potential Offset Narrow Product Offering, Chinese Competition Concerns

Armor IIMAK has a dominant share of the global thermal transfer ribbon, or TTR, market - the leading technology in industrial labeling - as well as resilient margins as a result of solid cost-pass through ability and benefits from fast-growing and defensive end-markets. The group’s modest size, narrow focus on a single niche market and low-cost Chinese competitors raised some concerns, however it expects strong volume growth to drive earnings up, which should translate into meaningful cash generation and deleveraging once initial investments to integrate its acquisition of IIMAK are complete. In addition, the current market volatility will mean pricing on the group’s proposed €450 million seven-year term loan B will likely be attractive, sources told Reorg.

The term loan, of which up to €40 million equivalent might be carved out in dollars, backs the acquisition of a 40% stake in the group by sponsor Astorg. The deal valued the group at €875 million, which works out at 10.5x Armor-IIMAK’s expected FY’21 pro forma adjusted EBITDA of €83.2 million. The financing will be 5.2x net levered at closing and includes an €85 million 6.5-year RCF.

While starting leverage is relatively high, the deal benefits from a substantial equity cushion, with listed value-add packaging peers implying a valuation of Armor-IIMAK of about 10x, one buysider noted.

The current executive chairman of Armor-IIMAK is reinvesting two-thirds of his equity proceeds as part of the deal, which is especially reassuring in light of the emergence of potential accounting irregularities and compliance breaches at specialist flexible packaging group Schur Flexibles just four months after its term loan was syndicated, another buysider said.

Armor-IIMAK is the global leader in the manufacturing of ink-coated ribbons, the consumable used during the thermal transfer process in printing traceability information on labels and flexible packaging such as barcodes, expiry dates and batch numbers. After Armor’s acquisition of U.S.-based IIMAK late last year, the group has a commanding 40% share of the global TTR market and is more than twice the size of its closest competitor.

Its sales are well diversified geographically, with EMEA accounting for 44%, the Americas for 39% and APAC 17%, while the highly stable pharma & healthcare and food & beverages markets account for 24% and 66% of its end-markets, respectively. In addition Armor-IIMAK’s products constitute an insignificant cost of the end products, making its customers less price-sensitive, which has enabled the group to pass-through raw material increases with typical lags of just 2-3 months, one buysider said.

However, some prospective investors are concerned whether Armor-IIMAK can continue passing through raw material prices hikes in full given that oil prices are surging and the group’s core inputs are plastic, wax and resin, all of which are derived from oil.

The group has also faced intense competition from low-cost Chinese players in recent years but has managed to defend its market share. Chinese TTR producers mostly operate in the low value-add wax segment, whereas Armor-IIMAK operates mainly in the higher value wax/resin and resin segments, which offer more durable printing. The group also works closely with the OEMs that manufacture printing equipment and on-sell Armor-IIMAK’s ribbons to their customers. OEMs typically tailor printers to end-customers, which make it difficult to switch to third-party ribbon suppliers and effectively lock-in Armor-IIMAK, whereas its Chinese competitors generally work with Slitters, which convert large ribbon rolls into narrower rolls, another buysider added.

Armor-IIMAK generated around 43% of its FY’21 revenues via OEMs and just 8% via Slitters. It has longstanding relationships of over 20 years with its largest OEM clients.

However, given the group has an annual turnover of just €355 million and a narrow focus in terms of its products, investors focused closely on potential substitution risks. The main competing industrial labeling technologies comprise direct thermal, inkjet, laser and RFID tags, however TTR offers the highest level of durability and cost-efficiency, according to management. Direct thermal only offers printing in black and is prone to fading, while inkjet printing tends to be messier given the ink is applied by spraying. The biggest threat is from laser printing, however this technology is more costly and less safe due to the high temperatures involved, two sources said.

Armor-IIMAK provided a bullish forecast driven by expectations of about 7% annual volume growth, which it expects to more than offset some slight pricing pressure and result in roughly 5.5% topline growth over the 2022-2025 period. It also expects margins to steadily improve as a result of increased efficiencies at the IIMAK plant in the U.S., which is relatively inefficient compared to the group’s French and Chinese plants. That should grow pro forma adjusted EBITDA to €89.5 million in 2022, to €96.6 million in 2023, to €104.3 million in 2024 and €111.4 million in 2025.

Automating the U.S. plant will be a drag on cash next year, but the group expects to generate about €20 million free cash flow in 2023, close to €40 million in 2024 and close to €50 million in 2025. As a result it expects net leverage to steadily improve and fall to 2.9x by the end of 2025.

Given the substantial equity cushion in the structure Armor IIMAK will likely return to the market and tap the loan to fund bolt-on acquisitions, which could slow deleveraging, one buysider suggested.

The term loan B is guided at 99 to 99.5 with a margin of Euribor+450 bps. That looks fair for the deal’s B2/B+ rating, however, given the current market volatility investors expect pricing to widen, sources said. German flexographic print group XSYS priced a €435 million first lien senior secured term loan at Euribor+425 bps with an OID of 99.75 in November last year, which is currently trading at about 99. Since XSYS is a stronger credit as a result of higher margins and better cash generation, Armor IIMAK should price wider, one buysider argued.

Armor-IIMAK’s capital structure is below:
 
Armor-IIMAK’s deal documentation looks reasonable with grower baskets in line with market standards. But the term loan features a three 25 bps step-down margin ratchet, which will likely be cut back to two step-downs in line with pushback on recent deals, the buysiders said.

The deal faces some slight ESG concerns given that the TTR process produces some single-use plastic waste. The group told investors that it is currently not viable to switch completely to recyclable PET, however it is better than its competitors in terms of the PET content of its products and it offers a collection service for its plastic waste, which it incinerates to avoid it going to landfill, buysiders noted.

Commitments are due at 5pm GMT today.

–Robert Schach, Beatrice Mavroleon