Packaging Corp will acquire three sheet plants, two box plants, two fulfillment centers and four design centers. The company is pointing to EBITDA multiple of 4.3x and notes the deal will be immediately accretive to EPS, according to analysts at Citi. TimBar had 2015 sales of $324 million.
Citi termed the deal as positive, as the acquisition would allow Packaging Corp to integrate abut 200kt of additional board, increasing its integration rate from 87 percent to 93 percent. Higher integration rate means more margins.
"We see the deal as potentially $0.25–$0.30 EPS accretive in the first year; Paper packaging deals typically achieve synergies at ~6 percent of target sales and PKG achieved ~7 percent with the BZ acquisition," analyst Anthony Pettinari wrote in a note.
Elsewhere On The Street
Meanwhile, Mark Wilde of BMO said most of TimBar's plants are in the eastern U.S. and the business has a strong "value-added" element that fits well with Packaging Corp. At full run-rate, the analyst said the deal should add $0.42 a share to EPS.
"All-in, PKG could easily realize about $50 million of synergies, in our view. We estimate that on a pre-synergy basis, PKG paid 8.5–9.5x for TimBar — in line with recent transactions. Our model assumes PKG realizes roughly 60 percent of the synergies in 2017, implying a 6 percent EPS accretion ($0.29/share)," Wilde wrote in a note.
Further, ratings agency Moody's views the acquisition of TimBar as credit positive, as TimBar's high quality converting facilities will further boost Packaging Corp's forward vertical integration level, while only temporarily increasing its leverage.
Packaging Corp's Baa3 senior unsecured rating and stable outlook remain unchanged, Moody's noted.
The Industry And Moving Forward
Furthermore, Citi noted that Packaging Corp is operating in an industry where absent stronger industry demand or price improvement; "The easiest way for integrated producers to boost their margins is to increase their integration rate."
The companies can achieve higher integration rates either by acquiring non-integrated converting assets or by gaining share with their existing box plants.
On the future M&A front, Citi said the number of independent targets is declining despite the company's excellent track record of integrating acquired box plants.
"With PKG's integration rate now in the low-mid 90s, we think the company may revisit mill-side acquisitions or potential conversions of its existing mill footprint (PKG operates 5 white paper machines)," Pettinari highlighted.
In addition, Pettinari said although the TimBar deal makes sense for Packaging Corp, "the recent flurry of converter acquisitions [...] could cause increased price competition at the box plant level."
Pettinari has a Neutral rating and $69.00 price target on Packaging Corp, while Wilde maintained his Outperform and $72 price target on the stock.
Across the Street, the mean recommendation is a Buy, but the mean target price has almost been reached already.
Shares of Packaging Corp of America were up 0.35 percent on the day at $68.71 shortly before Thursday's closing bell.
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