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Packaging Corporation of America to Buy Assets for $265M

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Packaging Corporation of America (PKG - Free Report) recently entered into a definitive agreement to acquire mostly all assets of Sacramento Container Corporation, and 100% of the membership interests of Northern Sheets, LLC and Central California Sheets, LLC for $265 million.

The cash-free, debt-free transaction is structured as a purchase of assets, resulting in a full step-up of the assets to fair market value. Per the deal, Packaging Corporation of America will buy full line corrugated products and sheet feeder operations in McClellan and Kingsburg, CA.

The buyout will likely boost the company’s operations both geographically and strategically. Also, the customer-focused employees and strong management teams of Sacramento Container, Northern Sheets and Central California Sheets will sync perfectly with Packaging Corporation of America.

The transaction, subject to customary conditions and regulatory approval, is expected to close early in fourth-quarter 2017. Packaging Corporation of America plans to finance the transaction with available cash on hand.

The purchase price multiple of approximately five times EBITDA is based on  the value of the expected synergies post buyout, the tax benefit of the step-up of assets and the operations’ EBITDA The acquisition will be accretive to earnings immediately.

In addition, Packaging Corporation of America announced that it will cease the production of uncoated freesheet (UFS) and coated one-side (C1S) grades at its Wallula, WA mill in second-quarter 2018, to commence the conversion of its 200,000 ton-per-year No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine with an annual output of 400,000 tons per year. The mill’s No. 2 paper machine will continue to produce 150,000 tons-per-year of semi-chemical medium.

The Wallula mill primarily produces white paper, but also produces semi-chemical corrugating medium on one of its paper machines. Its year-end 2016 annual estimated production capacity was 147,000 tons. In 2016, the mill produced 133,000 tons of semi-chemical corrugating medium.

The conversion of the No. 3 paper machine is planned with an initial production rate of approximately 60% of capacity. Ultimately, production will increase to 1,150 tons per day, once a new headbox, forming section, and shoe press are added in fourth-quarter 2018.

The conversion of the Wallula mill will help Packaging Corporation of America to integrate over 200,000 tons of containerboard to Sacramento Container acquisition, and enable further optimization and enhancement of the current mill capacity and box plant operations. Moreover, the conversion will significantly enhance the mill’s profitability and viability.

Packaging Corporation of America will incur the capital cost of the conversion of around $150 million. Further, discontinuing paper operations at the Wallula mill will result in pre-tax cash severance and other shutdown charges of approximately $20-$25 million and approximately $45-$55 million of pre-tax noncash asset impairment and accelerated depreciation charges. The company expects to record charges of $25-$35 million in third-quarter 2017.

The company will work closely with customers to ensure a smooth transition. Throughout this transition, all customers will continue to receive high-quality products and services.

In the past year, Packaging Corporation has outperformed its industry with respect to price performance. The stock gained 43.1%, while the industry rose 7.1%.

Packaging Corporation currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering in the same sector are AGCO Corp. (AGCO - Free Report) , Terex Corp. (TEX - Free Report) and Caterpillar Inc. (CAT - Free Report) . All the three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has an average positive earnings surprise of 39.70% for the trailing four quarters. Terex generated an outstanding average positive earnings surprise of 122.78% over the past four quarters, while Caterpillar has an average positive earnings surprise of 41.43% for the last four quarters.

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