Baird has maintained its Outperform rating on Berry Plastics Group Inc BERY following its deal to buy AEP Industries Inc. AEPI for $765 million.
Berry expects to realize cost synergies of $50 million or more annually. The deal would be accretive to Berry's adjusted net income and adjusted free cash flow by more than 10 percent. On a pro forma basis, Berry's four quarters ended June 2016 adjusted free cash flow would increase by approximately $85 million to $560 million.
"In our opinion, the addition of AEP Industries to the Berry Plastics portfolio adds an increased critical mass dimension to the company and the plastics packaging industry as a whole, noting that the combination is both strategically and financially accretive," analyst Ghansham Panjabi wrote in a note.
Panjabi believes the free cash flow profile of the combined enterprise should top $650 million post integration (about $0.50 accretion on an EPS basis) and trend towards 4x net debt:EBITDA by the end of 2017.
"[W]e believe that the investment profile for Berry Plastics has improved post the AEPI acquisition, with BERY one of our top picks within the Defensive Packaging sub-set (~11% free cash flow yield on FY17E)," Panjabi added.
The analyst also raised his price target to $55 from $48.
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