8-K: Star Equity Holdings Acquires Timber Technologies, Expanding into Engineered Wood Products

Star Equity Holdings has acquired Timber Technologies, a manufacturer of engineered wood products, for $23 million, marking a significant expansion into the engineered wood products market.

Summary

• Star Equity Holdings has completed the acquisition of Timber Technologies, a Wisconsin-based engineered wood products manufacturer, for a total of $23 million.
• The purchase price includes $16 million in upfront cash, $4 million in deferred cash, and a $3 million earn-out payable 50% in cash and 50% in shares of Star Equity's preferred stock.
• The earn-out is based on Adjusted EBITDA targets of $5.4 million and $6.0 million for the first and second years, respectively.
• Star Equity will also acquire the associated real estate for $3 million in a separate transaction expected to close in June 2024.
• The acquisition was partially financed by a $7 million term loan from Bridgewater Bank.
• Timber Technologies had revenue of $18.8 million and Adjusted EBITDA of $5.5 million for the full year 2023.
• The co-owners and operators of Timber Technologies, Tom Niska and Dale Schiferl, will remain with the business in their current roles.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to the strategic acquisition, expected financial improvements, and the retention of key personnel. The company is clearly optimistic about the future growth prospects.

Positives

• The acquisition diversifies Star Equity's Building Solutions division into new end markets.
• Timber Technologies has a 20-year history of consistent profitability and strong cash generation.
• The acquisition is expected to improve Star Equity's overall profitability.
• Timber Technologies' products are taking market share from less sustainable building materials.
• The strategic location of Timber Technologies allows for collaboration with Star Equity's existing businesses in the Minneapolis metro area.

Negatives

• The acquisition involves a $7 million term loan, increasing Star Equity's debt.
• The earn-out payment is contingent on achieving specific Adjusted EBITDA targets, which may not be met.
• The real estate acquisition is a separate transaction and is subject to its own closing conditions.

Risks

• The company has a substantial amount of debt and may need to refinance or incur additional debt in the future.
• There are restrictions in the debt agreements that limit management's discretion in operating the business.
• The company is subject to legal, regulatory, political, and economic risks, including public health crises.
• There are risks associated with the company's ability to execute its business strategy and pursue acquisitions.
• The company may face challenges in integrating new technologies and may experience system failures.

Future Outlook

Star Equity Holdings expects Timber Technologies to improve its overall profitability and provide growth opportunities within its Building Solutions division. The company will continue to pursue growth opportunities through both organic growth and acquisitions.

Management Comments

• Rick Coleman, CEO of Star, stated that the acquisition of Timber Tech marks a significant step forward in Star's expansion strategy and will greatly improve Star's overall profitability.
• Tom Niska & Dale Schiferl, Co-Owners of Timber Tech, expressed their excitement to partner with Star and lead Timber Tech into its next phase of growth.
• Jeff Eberwein, Executive Chairman of Star, noted that the acquisition effectively replaced Digirad with a more complementary business of similar EBITDA but with stronger growth, margins, and free cash flow.

Industry Context

This acquisition reflects a trend of companies seeking to diversify their portfolios and capitalize on the growing demand for sustainable building materials. The engineered wood products market is experiencing growth due to its environmental benefits and superior performance compared to traditional materials.

Comparison to Industry Standards

• Timber Technologies' 2023 revenue of $18.8 million and Adjusted EBITDA of $5.5 million are strong indicators of a healthy business in the engineered wood products sector.
• Comparably, companies like Boise Cascade and Louisiana-Pacific, which also operate in the building materials space, have shown similar growth patterns in their respective segments.
• The acquisition price of $23 million, with an earn-out structure, is a common approach in the industry to align the interests of the buyer and seller.
• The use of a term loan to partially finance the acquisition is a typical financing strategy for such transactions.

Management Changes

Stakeholder Impact

• Shareholders: The acquisition is expected to create value for shareholders through improved profitability and growth.
• Employees: Three Timber Tech employees received RSUs, and the co-owners will remain with the business.
• Customers: The acquisition is expected to enhance the product offerings and market reach of Timber Technologies.
• Suppliers: The acquisition is not expected to disrupt existing supplier relationships.
• Creditors: The acquisition is partially financed by a term loan, increasing the company's debt.

Next Steps

• Star Equity will complete the acquisition of the associated real estate in June 2024.
• Timber Technologies will continue its operations as part of Star Equity's Building Solutions division.
• Star Equity will pursue further growth opportunities through organic growth and acquisitions.

Key Dates

Keywords

engineered wood products, acquisition, glulam, timber technologies, star equity holdings, building solutions, adjusted EBITDA, term loan, real estate, manufacturing