ACCO Brands cut debt, lowered leverage ratio in 2011, lines up funding for Mead acquisition

By Paul Deckelman

New York, Feb. 15 - ACCO Brands Inc. cut debt by some $59 million in 2011 via bond buybacks and further generated enough cash to reduce its year-end net debt by nearly $100 million and bring its total leverage ratio down by nearly a full percentage point.

And the Lincolnshire, Ill.-based office products distributor's executives said Wednesday that further debt cutting will be a priority, especially in view of the new borrowing the company will be doing to finance its pending acquisition of MeadWestvaco Corp.'s consumer and office products business.

Bond buybacks during the year

During the conference call with analysts following the release of financial results for the 2011 fourth quarter and fiscal year ended on Dec. 31, Neal V. Fenwick, ACCO's executive vice president and chief financial officer, noted the $59 million debt reduction during the year, which brought the company's total debt level down to $669 million from $727.6 million at the end of the 2010 fourth quarter and fiscal year.

According to company filings with the Securities and Exchange Commission, through the first nine months of 2011, the company had repurchased $25 million of its 7 5/8% senior subordinated notes due 2015 and $34.9 million of 10 5/8% senior secured notes due 2015 in the market at individually negotiated prices and in response to unsolicited offers to sell from bondholders or their agents.

ACCO said that it was able to do so as a result of its strong cash position, enhanced by the proceeds from the sale in June of its GBC Fordigraph Pty. Ltd. business in Australia, on undisclosed terms. The note buybacks took place during the second and third quarters of the year, with none occurring in the fourth quarter.

Fenwick called fourth-quarter operating cash flow "strong" at $80 million, bringing the full-year cash-flow figure to $106 million before costs related to the pending Mead transaction. Excluding operating cash and proceeds from the GBC Fordigraph sale as well as Mead-related costs, full-year free cash flow was $53 million.

Lower leverage ratio

Besides the $59 million year-over-year reduction in total debt, the company's cash and equivalents grew to $121.2 million from $83.2 million a year earlier, bringing the company's net debt figure for total debt less cash and equivalents down to $547.8 million at the end of 2011, versus $644.4 million a year earlier.

Fenwick said that ACCO's leverage ratio of net debt divided by trailing 12-month adjusted supplemental EBITDA from continuing operations fell to 3.3 times at year-end, from 4.1 times a year earlier.

Fenwick declared that this was "our lowest level so far as a public company. We are pleased that our balance sheet has become very manageable, even before the acquisition of MeadWestvaco Consumer and Office business, which will increase our annual cash flows."

ACCO's senior secured debt fell to $422.7 million at year-end from $456.3 million a year earlier, cutting its ratio of senior secured debt versus adjusted EBITDA to 2.5 times in the latest quarter from 2.9 times a year ago.

Debt-cutting a priority

During the question-and-answer portion of the call following the formal presentations by Fenwick and the company's chairman and chief executive officer, Robert J. Keller, an analyst noted that ACCO is projecting generating between $50 million and $60 million of free cash flow in 2012 and wondered what the company's priority for the use of that cash might be.

Fenwick replied that "at the moment, one of the challenges we have is our inability to reduce debt. On a going-forward basis after the [Mead] merger we will have a lot of debt that we can pay down and our focus will be to continue to pay debt down."

However, he ruled out doing this by calling the company's existing bonds for redemption. The open-market buybacks last year left $246.3 million of the 7 5/8% notes outstanding out of the $350 million originally sold in fall of 2005, and $420.7 million of the 10 5/8% notes outstanding out of the $460 million originally sold in the fall of 2009, according to the date filed with the SEC.

The 7 5/8s are currently callable at 101.27, while the 10 5/8s become callable at 105.313 this coming Sept. 15.

But Fenwick told one of the analysts on the call - who asked whether the company's projection for a 30% increase in earnings per share for 2012 excluded calling any of the notes that his conclusion was correct and that "it assumes the existing capital structure carried on for the whole year."

Keller added that if for any reason the Mead transaction did not take place, "we would refinance" those bonds.

A big deal for ACCO

The Mead transaction, announced on Nov. 17, calls for MeadWestvaco, which is primarily a packaging company, to spin off its office and consumer products division into a new entity, the shares of which will be distributed to its existing stockholders in a tax-free transaction in return for a $460 million dividend to MeadWestvaco from the new entity.

Immediately after the spin-off and distribution, the newly formed company will merge with and into a subsidiary of ACCO Brands. The transaction is valued at some $860 million, and upon its completion - it is currently undergoing government scrutiny and is expected to close some time in the first half of the year - MeadWestvaco shareholders will own 50.5% of the combined company.

In announcing the deal, ACCO said the transaction, beside "significantly" enhancing its cash-flow generation would also allow the company "to re-capitalize its balance sheet and reduce its interest rate significantly," and to improve its leverage profile; it projected net leverage of 3.6 times for the combined entity versus 3.9 times for ACCO alone at the time the deal was announced.

ACCO is lining up the financing for its purchase of the Mead unit and refinancing its own existing debt.

It is shopping a $920 million senior secured credit facility in the bank-debt mark, seeking commitments from potential lenders. That facility would include a $300 million term loan A tranche, a $370 million term loan B tranche and a $250 million revolving credit line.

ACCO also expects to issue $270 million of high-yield bonds that are backed by a senior unsecured bridge loan commitment.

Keller, after reviewing the company's fourth-quarter performance - which included increases of 26% and 36% from a year ago in adjusted earnings per share for the fourth quarter and the full year, respectively - said that "we're very pleased with how we performed in 2011, we feel very good about how we're positioned for 2012 and we are incredibly excited about the transaction with Mead."

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