Newalta plans to reorganize

On February19, 2015 Newalta released it's fourth quarter and annual results;they also announced the proposed sale of it's Industrial Division.The main parts of which are the Stoney Creek landfill and the waste cleanup of oilfield operations.The landfill operation is not connected to any of it's other operations but the oilfield operations are connected to their new heavy oil facility that they are installing in Fort Macmurray in 2015.It is another part of their oil waste operations.The sales agreement is expected to close in Q1 2015.The expected sale price is $300 million.
 The benefits
 Sales for 2014 were about $363 million. So the proposed price is about 84% of the last year's sales and about 6 times gross profits and slightly above 6 times EBITDA.The falling commodity prices have not affected NAL profits nor EBITDA in Q4.The increase in EBITDA in Q4 was greater than for the year not less.Profits are still going up slightly not down.                                                       On an annual basis, sales of the Industrial Division have been constant and so has EBITDA.This kind of business does not get price increases every year nor large increases in volume every year.But there could be a significant  increase in both every 5 years.There could be a jump of 10 to 20% in price and 5 to 10% in volume as the population grows.Sales could be stable in 2015 but show a good jump in 2016.This is the kind of business that would be beneficial with a royalty on sales or on gross profits.For example a 5% royalty on sales would bring the total price closer to 95% of sales  in a few years.
   A growing business 
  Both of these operations in the Industrial Division are likely to have bumpy growth.They both will increase as population increases.So a royalty might be a good way of capturing this growth.This blog suggests 5% as an initial offer but NAL may have to back down slightly.However Newalta is well aware that the multiple of gross profits is more likely to be 7 or 8 for a growing business versus 5 or 6 for a fairly stable business.With that in mind the buyer may be lucky to take a 5% royalty.