Magnera (MAGN): A Spin-Off Opportunity
Synergies, cash flow, and undervaluation make Magnera (MAGN) a compelling post-spin-off investment.
Investment Highlights (TLDR)
Significant Valuation Upside: Magnera trades at an estimated EV/EBITDA multiple of ~6x, significantly below JPMorgan’s fair value multiple of 7x and the peer average for Berry Global (BERY) and Mativ Holdings (MATV). This implies a 16%–33% upside potential, excluding synergies, growth or deleveraging.
Synergy-Driven Growth: The merger is expected to deliver $80 million in annualized synergies, valued at approximately $600 million (7.5x). These synergies could double earnings and the stock price over the next few years if realized.
Robust Free Cash Flow: I expect the combined company to generate $82 million in levered Free Cash Flow (FCF) for 2024, translating to a 13% levered FCF yield on the current market cap of $632 million. JPMorgan’s earlier analysis appears outdated, as lower interest rates and additional debt restructuring support stronger cash flow.
Deleveraging Potential: With $2.08 billion in gross debt and a weighted average cost of debt currently at 6.7%, Magnera plans to reduce net debt-to-EBITDA from 4.0-4.5x to 3.0–3.5x within three years, improving financial flexibility and driving EPS accretion.
Attractive Market Dynamics: Supported by secular trends in sustainability, hygiene, and filtration, Magnera is poised for a 3.5% revenue CAGR and 9.7% EBITDA CAGR through 2028. Key customer relationships with P&G, Kimberly-Clark, and Keurig Dr Pepper further reinforce stability and growth.
Inflection Point in Sales: After facing sales declines in 2022 and 2023 due to macroeconomic headwinds and destocking, Magnera has shown an upward inflection in recent quarters. This recovery aligns with secular tailwinds and repositioned capacity for growth.
Early Analyst Coverage: Wells Fargo very recently initiated coverage with a $22 price target, highlighting Magnera’s attractive valuation and potential. The stock currently trades under $18, providing an opportunistic entry point.
Company Overview
Business Model
Magnera (NYSE: MAGN) produces nonwoven and engineered materials serving diverse end-markets, including hygiene, healthcare, and industrial applications. Key products include filtration media, hygiene materials, and specialty papers. Think disposable items such as diapers and Keurig coffee filters.
Formation Through Spin-Off and Merger
Magnera was formed in November 2024 through the spin-off of Berry Global’s Health, Hygiene, and Specialties (HHNF) segment, which subsequently merged with Glatfelter Corporation’s engineered materials business. This strategic combination created a newly listed specialty materials leader with enhanced scale, diversified markets, and a compelling synergy opportunity.
Key Segments
Hygiene and Healthcare Materials: Nonwoven fabrics for personal hygiene, medical wipes, and incontinence products.
Industrial Applications: Specialty papers and materials for construction, filtration, and packaging.
Competitive Position: Magnera is a leader in the specialty materials industry, leveraging economies of scale, established customer relationships, and a strong innovation pipeline.
Investment Thesis
Core Growth Drivers
Secular Tailwinds: Increasing demand for sustainable materials, hygiene products, and filtration solutions supports consistent revenue growth.
Customer Relationships: Major clients like P&G, Kimberly-Clark, and Keurig Dr Pepper provide stable demand and long-term contracts.
Post-Merger Synergies: $80M in annualized synergies will drive EBITDA growth and enhance margins.
Excess Capacity: Russia and Ukraine accounted for 7% of Glatfelter’s sales in 2021 before the war broke out. It’s repurposed some of this, but excess capacity remains available, minimizing new capex for near-term sales growth.
Competitive Advantages
Scale and Scope: The combined entity has a diversified customer base and operates across high-growth markets.
Resilient Free Cash Flow: SpinCo maintained a 7.5% FCF margin in 2023 despite sales declines, highlighting operational efficiency.
Innovation: Focus on sustainable, bio-based materials aligns with evolving customer preferences.
Capital Allocation
Management is prioritizing synergies, debt reduction, and reinvestment in R&D to support future growth. Deleveraging to a 3x net debt-to-EBITDA ratio within three years is expected to drive EPS accretion and valuation re-rating.
Management plans to target a 3x net debt-to-EBITDA ratio within three years, down from about 4.0-4.5x today depending on your EBITDA estimate. It also has a $350 unused revolver and no debt maturities until 2029.
Risks to Thesis
Integration challenges in realizing synergies.
Revenue concentration risk with large customers in markets that experienced COVID tailwinds, though I believe we have far lapped those base effects.
Sensitivity to raw material costs and macroeconomic headwinds. Sales declined in 2022 and 2023 but have now seen an inflection upward in recent quarters.
Net Sales Trends
The latest prospectus dated September 20, 2024, mentions modest YTD revenue declines and this is true on a 9-month basis. However, I spent some time digging into the quarterly releases for each of GLT and HHNF - and we have an interesting inflection in sales growth illustrated by the chart below on a YoY quarterly basis. Note below that I could not obtain sufficient data for the December 2023 quarter for GLT YoY.
Financial Analysis
Valuation
EV/EBITDA: I estimate conservatively that MAGN has a current multiple of ~6x representing a discount to JPMorgan’s fair value of 7x in the prospectus, implying a 16% upside excluding all else. The valuation gap widens to 33% when compared to an average of peers including Berry Global and Mativ Holdings (MATV).
Synergy Contribution: $80 million in annualized synergies valued at $600 million (7.5x) could significantly enhance shareholder value. These synergies are not included in the $412 million 2024 EBITDA estimate provided by JPMorgan in its analysis. Even $72 million of synergy alone (as noted in the older slide below) could potentially double EPS and the stock price within a few years.
Equity Value Potential: The combination of full synergy realization and a peer re-rating could reasonably double Magnera’s current market cap of $632 million (or $17.90 per share).
Key Metrics
EBITDA (2024): $412 million pre-synergies.
Unlevered Free Cash Flow (2024): I estimate $222 million of UFCF vs. JPMorgan’s older $178 million estimate from a year ago.
Levered Free Cash Flow (2024): I estimate $82 million, translating to a 13% FCF yield on current market cap seen below.
Balance Sheet and Debt Structure
Post-transaction, Magnera ends up with $2.08 billion of debt at a weighted-average interest rate of 6.7% - or $140 million of interest expense.
Total Debt: $2.08 billion, comprising:
$500 million at 4.75% fixed due 2029.
$785 million floating at 7.50% due 2032.
$800 million at 7.25% fixed due 2031.
Net Debt/EBITDA: Projected to decrease from 4.5x to 3.0-3.5x within three years, improving financial flexibility and EPS. Management, when they last presented, communicated a top priority to debt reduction and proactive capital allocation regarding deleveraging.
It is important to note that management advertised a 4.1x net leverage ratio early in 2024, but this was based on a $455 million estimated EBITDA for 2024. JP Morgan estimated $412 million so I am going with that for the purpose of conservatism. However, I have not yet modeled my own estimate for 2024 EBITDA myself.
Legacy Share-Based Equity Awards
Regarding valuation, it is worth mentioned that some legacy share-based awards carry over into the new entity. I do not see these as very significant, perhaps a 1-2% dilution rate per year at most on the share count. I do mention it here so you are aware and can conduct additional research if desired. We should receive better information on that in the next SEC filing.
Long-Term Potential
Magnera is well-positioned for sustained growth, driven by industry tailwinds, robust free cash flow, and innovation. Over the next 5–10 years, the company could achieve:
Margin Expansion: Realization of synergies and operational efficiencies, such as higher capacity utilization, will drive EBITDA growth and improve overall profitability.
Revenue Diversification: Expanding customer relationships and geographic reach will reduce revenue concentration risk and capture opportunities in emerging markets.
Enhanced Valuation: The current valuation discount to peers could close as the company achieves:
Deleveraging: Reduction in net debt-to-EBITDA through robust cash flow generation.
Company Guidance Initiation: The first earnings release (expected on February 21, 2025) will provide investors with clarity on the company's performance and strategy, potentially improving market perception.
Peer Re-Rating: A re-rating to peer multiples (e.g., P/E or EV/EBITDA) could unlock additional value.
JPMorgan, retained by Glatfelter and Berry Global in 2023 and 2024, estimated a combined revenue CAGR of 3.5% over the next four years. This estimate, informed by management’s input, reflects a realistic growth rate given the market environment when including price and volume together.
Recent headwinds, including sales volume declines in 2022 and 2023 due to factors like the Ukraine war, customer destocking, and resin cost spreads, suggest the company may be at a cyclical low. Encouragingly, recent performance has shown signs of an inflection point, with net sales beginning to trend higher, as discussed earlier.
Conclusion
I’ve been following this spin-off from Berry Global for the past year but only took a closer look last week. Magnera began trading just two months ago in November 2024, and like many spin-offs, it may present a compelling buying opportunity for patient investors. Spin-offs often experience downward pressure from structural ownership imbalances and lack of coverage/guidance, so I typically wait several weeks post-listing before making a move.
Two recent developments prompted me to act. First, the stock dipped near $17, creating an attractive entry point. Second, Wells Fargo initiated coverage just two days ago with a price target of $22. Given the limited company guidance so far, this early coverage is noteworthy. On Thursday, I initiated a 2% allocation in my portfolio at an average cost around $17.40.
Magnera aligns well with the Safe Harbor Stocks investment framework through its:
Strong free cash flow and EBITDA growth potential, supported by operational efficiencies and synergy realization.
Competitive advantages in scale, innovation, and sustainability that position it as a leader in the specialty materials sector.
Attractive valuation, offering a margin of safety with significant upside potential.
Magnera represents a unique opportunity for long-term investors to gain exposure to the specialty materials sector. Its combination of near-term catalysts and long-term growth drivers makes it a compelling addition focused on cash flow generation, competitive advantages, and undervalued opportunities.
I will write a follow-up article on MAGN after the upcoming earnings release by the company. I have my own ideas as to what the company may guide towards, but we are a month away so I will await their report. In addition to the drivers mentioned above, any incremental revenue growth will provide even larger growth down the income statement given the double-digit EBITDA margin.
Investor Poll: Whether you are a CIO or retail investor, would anyone be interested in a YouTube Live video with screen sharing where I walk through my approach to due diligence on spin-offs and IPOs beginning with the prospectus?
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Disclosure: This information is provided for informational purposes only and should not be considered a solicitation or recommendation to buy or sell any securities. The author or entity providing this information may hold positions in the securities discussed. This is not investment advice.
Thank you for the due diligence. Really interesting. I like how you write things up.