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Packaging Corporation Set to Acquire Boise

SEE PKG KS

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Packaging Corporation of America (PKG - Snapshot Report) recently inked a deal to acquire Boise Inc. in a transaction worth $1.995 billion in cash. The transaction is expected to close by the fourth quarter of 2013, subject to regulatory approvals. The deal is expected to be immediately accretive to Packaging Corporation, leading the stock price to rise around 11% to $60.43 on the close of trading at Sep 16, 2013.

Based in Boise, Idaho, Boise produces a broad range of packaging and paper products. Some of these packaging products include linerboard and corrugating medium, corrugated containers, sheets and protective packaging products, while its paper products comprise imaging papers for the office and home, printing and converting papers as well as papers used in packaging, such as label and release papers.

The Deal

According to the agreement, Packaging Corporation will acquire Boise through one of its subsidiaries. The company will pay $12.55 per share in cash for the acquisition. Moreover, the transaction value includes Boise’s outstanding debt of $714 million. 

Expected Synergies

The strategic acquisition will increase Packaging Corporation’s containerboard capacity by 42% to 3.7 million tons. The deal is also likely to boost the company’s corrugated products volumes by 30% Moreover, Packaging Corporation will get an upside in major fields such as mill grade optimization, sales mix and cost reductions, lower transportation costs, corrugated products optimization, and SG&A cost reductions. The company is expected to generate a pre-tax benefit of approximately $105 million from these arenas within three years of the deal’s closure. Packaging Corporation expects to use the cash flows generated from the combined companies to repay debt as well as return value to shareholders.

Valuations

The combined companies generated sales of $5.5 billion in the last twelve months (LTM) ended Jun 30, 2013, with the packaging business accounting for 75% of sales and the remainder being contributed by Boise’s paper business. Moreover, the combined entity generated $879 million in earnings before interest, taxes, depreciation and amortization (EBITDA), which excluded special items, in the LTM ended Jun 30, 2013.

The transaction value represents an adjusted LTM EBITDA ($297 million excluding special items) multiple of 6.7x. Moreover, including $105 million benefits derived from synergies, the purchase value represents LTM EBITDA multiple of 5.0 x.

The deal by Packaging Corporation has consolidated the industry. Experts believe that such transactions could further open doors for similar mergers and acquisitions.  

Packaging Corporation currently has a Zacks Rank #3 (Hold). Some better-performing stocks in the consumer goods sector include Sealed Air Corporation (SEE - Analyst Report) and KapStone Paper and Packaging Corporation (KS - Snapshot Report). Both the mentioned stocks carry a Zacks Rank #1 (Strong Buy).

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