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Moody's Retains Packaging Corp at Baa3

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Packaging Corporation of America (PKG - Free Report) has retained the Baa3 credit rating from global credit rating firm Moody's Investors Service. The Baa3-rating denotes a stable outlook with a relatively moderate credit risk and adequate liquidity to meet current financial commitments.

While reiterating its credit ratings, Moody’s has considered Packaging Corporation’s recent agreement to acquire Boise Inc. in a transaction worth $1.995 billion in cash. 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.

The Baa3 credit rating signifies Packaging Corporation’s increased market presence post-merger. Moody’s also expects continued good operating and financial performance by seamless integration of 5 packaging mills and 3 paper mills. These mills produce premium category products that are likely to yield high operating margins.

Post-acquisition, Packaging Corporation’s pro forma leverage (debt/EBITDA) will increase to 3.4x (excluding synergies) from 1.9x as of Jun 30, 2013. Pro forma debt is set to increase almost two-fold to $3.2 billion from $1.2 billion as of Jun 30, 2013. The combined company is anticipated to generate strong free cash flow of about $150 million in the first 12 months of combined operations to reduce leverage to 2.5x - 3x over the next 12-18 months.

Headquartered in Lake Forest, IL, Packaging Corporation is the fourth largest containerboard producer in the U.S. The company manufactures several corrugated packaging products, including conventional shipping containers used to protect the goods.

Packaging Corporation currently has a Zacks Rank #3 (Hold). Some better-performing stocks in the consumer goods sector include Sealed Air Corp. (SEE - Free Report) and Sonoco Products Co. (SON - Free Report) , both carrying a Zacks Rank #2 (Buy).

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