Kaiser Aluminum has ‘plenty of dry powder’ with below-target 0.6 times leverage

By Paul Deckelman

New York, Sept. 14 – Kaiser Aluminum Corp. has what its chairman and chief executive officer called “a strong balance sheet,” with a leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA of just 0.6 times – although he said the company would not be afraid to raise that substantially should the right acquisition opportunity come along.

CEO Jack A. Hockema told participants at the Credit Suisse 29th Annual Basic Materials Conference on Wednesday in New York that “we have plenty of dry powder to fund organic [growth] as well as inorganic acquisition opportunities.”

According to the latest investor presentation on its website, as of the end of the 2016 second quarter on June 30, Kaiser – a Foothill Ranch, Calif.-based manufacturer of aluminum products for the aerospace and automotive industries, as well as other applications – had total debt on its balance sheet of $375 million, consisting solely of the 5 7/8% senior notes due 2024 that the company sold earlier this year.

Kaiser had priced that quickly shopped offering at par on April 28, after upsizing the transaction to $375 million from an originally announced $325 million. It used the proceeds to redeem all of its $197.8 million of then-outstanding 8¼% senior notes due 2020 and for general corporate purposes, which the company said may include, among other things, capital spending, acquisitions and repurchases of its common stock.

The company’s capital structure also includes a $300 million asset-based revolving credit facility due in December of 2020, which was undrawn as of June 30.

That $375 million total debt, measured against book equity of $808 million, for total capitalization of $1.183 billion as of June 30, produced a ratio of total debt as a percentage of total capitalization of 31.7%.

Matched against trailing 12-month adjusted EBITDA of $195 million, the debt figure produced a total debt-to-EBITDA leverage ratio of 1.9 times.

But subtracting the $267 million of cash and short-term investments on the balance sheet from the total debt produced net debt of $108 million, and the ratio of net-debt as an EBITDA multiple of 0.6 times.

During the question-and-answer portion of Hockema’s appearance at the conference, following his formal presentation, he was asked what the company’s optimum debt level was and replied that it was about 2 times net-debt to EBITDA.

He then was asked whether Kaiser might be interested in joining the current consolidation trend seen in the aluminum extrusion industry exemplified by the recent announcement that Kaiser sector peer Aleris Corp. had agreed to be acquired by Hong Kong-based Zhongwang USA LLC, in a transaction valued at $2.33 billion, including debt assumption.

Hockema said that in terms of Kaiser’s capital allocation priorities, “Number One is organic investment and Number Two is inorganic. So yes, we’re very interested in acquisition opportunities that create value for our shareholders in businesses that we understand.”

He added, though, that “we’re comfortable with the business model we have here and we don’t want to do anything that doesn’t really create value for our shareholders. So, yes we want to do acquisitions but no, we will not over pay for those acquisitions. We want to make sure that we’ve got a clear path to value creation.”

He said that Kaiser could “go well above [the 2 times optimum leverage level] for the right kind of synergistic acquisition – so long as we have a clear path on how we can drive that back down to 2 times within a reasonable number of years, and that’s 2 times net.

“So we’ll go up well over 3 times, maybe even up to 4 times or so for the right kind of acquisition – but it would have to be a really sweet spot for us to go up to 4 times, with good cash flow.”

© 2015 Prospect News.
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