VENTURES AFRICA – Mondi Group is risking severe pain from its acquisition of Nordenia International, with analysts saying that the paper producer is set to pay more in the long term by using bank loans as opposed to bonds.
Mondi, Europe’s largest producer of office paper, announced last week that it was to pay $292 million in cash for Johannesburg-based Nordenia and take on $485 million of its debt. Yet the company has chosen to use $305 million of available two-year bank borrowings to fund the deal rather than bonds, as a result of its desire to secure Nordenia as quickly as possible in order to boost Mondi’s consumer packaging business and reduce dependence on paper and pulp.
Yet experts say that this move helps Nordenia investors, but not Mondi’s. After the initial revelations yields on Mondi’s bonds rose by seven basis points while rates for Nordenia plunged by 183, yet news of how the deal will be funded saw Standard & Poor’s revise their outlook for Nordenia from stable to positive.
“Nordenia investors win and Mondi investors lose in the short term,” said Deryck Janse van Rensburg of BoE Stockbrokers. He said that to make the deal work Mondi may need to hugely increase spending over the next year on some of Nordenia’s operations to make the deal work.
Buying out Nordenia’s bondholders using bank loans will give Mondi less leeway, as it eats into the $600m Mondi has in undrawn bank facilities, according to Standard & Poor’s.
“Bank funding would be more expensive than the bond market,” said Rachel Lion of the ratings agency. “It would probably be cheaper to go to the bond market.” Though Mondi has declined to disclose the cost of its bank borrowings, it says the acquisition was appropriately structured.
“The two-year loan gives us easy, flexible funding for now and gives us a window to consider alternatives,” said Mondi chief financial officer Andrew King. “We may in future look at selling bonds on this debt.”