Baird Says Berry Plastics' AEP Acquisition Is Strategically, Financially Accretive

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.