After staying on the sidelines of the megamerger game sweeping
the paper and packaging industry the past few years, Packaging
Corp. of America moved to center field with a major acquisition
By accounts since the deal,Packaging Corp. of America (
) -- which is now on the IBD 50 list of top-rated growth stocks
-- hit a home run. And it's seeing more synergies than originally
PCA, as it's called for short, is the fourth-largest producer
of containerboard and corrugated packaging product in the U.S. It
paid $2.1 billion, including the fair value of assumed debt, for
paper and packaging products maker Boise.
The Boise buyout represents a departure for PCA, which
historically had grown mainly organically and when it did buys
they typically were only small, tuck-in acquisitions.
PCA had not been a player in the multibillion dollar M&A
wave that has consolidated its industry in recent years. Those
deals includedRock-Tenn Co.'s (
) $3.5 billion takeover of Smurfit-Stone Container in 2011
andInternational Paper Co. 's (
) acquisition of Temple-Inland in 2012 in a buy valued at $4.5
The Boise buyout expands PCA's corrugated products' geographic
reach and offerings, provides additional containerboard capacity
for continued growth in the packaging business and offers
opportunities in the white paper business, according to a company
filing with the Securities and Exchange Commission. The
acquisition also gives a nice lift to revenue and profit as well
as generating cost synergies.
What The Business Contains
PCA makes corrugated boxes used in everything from the basic
boxes for moving and shipping to custom-printed containers and
retail displays. It's also a big producer of packaging for meats,
processed foods, and other industrial and consumer products.
Boise's packaging products include linerboard, corrugated
containers and sheets, and protective packaging. Its paper
products include imaging papers, printing and converting papers,
and papers used in packaging.
On a September conference call announcing the deal, PCA
Executive Chairman Paul Stecko called the buy a "transformational
opportunity with excellent fit and unique and substantial
The synergies, he said, would come primarily from:
"containerboard grade optimization and sales mix, manufacturing
cost reduction, lower transportation cost, corrugated products
optimization, and SG&A (selling, general and administrative)
At the time, PCA expected synergies from the deal of $105
million over the next three years, to be achieved at about $35
million per year. But on its Feb. 11 fourth-quarter conference
call, PCA upped the synergy estimate to $175 million, at a run
rate of $75 million to $80 million by the end of the first
Actions taken immediately after the October 25 acquisition and
completed by the end of the year included the elimination of
about $25 million in overhead cost, primarily from reduced head
count and lower corporate governance cost, the company said.
PCA also paid down $150 million in debt since the acquisition
by the end of the quarter.
Vertical Research Partners analyst Chip Dillon calls the
buyout a "game changer."
"It shows that their disciplined approach toward acquisitions
has proved to be a benefit to shareholders," he said. "They
waited for a great deal, not just an OK deal. They were able to
hit the ball out of the park and buy something that will add 25%
per year to their underlying EPS and free cash flow per
Savings From Synergies
Morningstar analyst Todd Wenning says initially he had some
concerns about PCA management having enough experience managing a
paper business, because its focus has been on containerboard and
the fact that North American office paper demand is in secular
"We were pleasantly surprised by the amount of cost
synergies," he said. "Once they got into the white paper mills
they found they could apply some of the knowledge from their
containerboard mills to Boise's paper mills. They believe they
can achieve higher synergies than they initially expected from
The Boise acquisition, he adds, has also enabled PCA's stock
price gains to outpace those of peers Rock-Tenn and International
"Over the past year, the share price has been primarily driven
by the effects of the Boise acquisition," he said. "It's when the
announcement happened that the share price really took off
relative to International Paper and Rock-Tenn," Wenning said.
In the fourth quarter Boise generated a partial quarter's
contribution of 20 cents a share.
Overall PCA posted a standout quarter, with earnings,
excluding special items, up 70% to $1.04 a share where analysts
polled by Thomson Reuters expected just 89 cents. Net sales rose
72% to $1.264 billion, ahead of analyst estimates.
PCA's corrugated products shipments were up 4.4% from a year
earlier and increased 24% including Boise's partial quarter
shipments. Containerboard production, including Boise, was
803,000 tons, up 151,000 tons from a year earlier.
Analysts polled by Thomson Reuters expect the company to post
a 65% increase in earnings to $1.02 a share when it reports
first-quarter results on April 23.
They expect full-year 2014 earnings to rise 43% to $4.68 a
share. They see a 16% gain in 2015.
In a note following PCA's fourth-quarter results, Dillon
wrote: "We see Packaging Corp. of America as a strong story in
2014 and beyond based on the increasing contributions from the
October 2013 acquisition of Boise Inc. One could argue that this
deal is adding well over $1 a share in annualized accretion based
simply on the first two months' results.
"Ultimately, with management increasing the three-year synergy
target to $175 million, we see Boise eventually adding more than
$1.50 to PKG's per share earnings potential," he wrote.
Combined with Boise, PCA maintains its position as the fourth
largest producer of containerboard and corrugated products in the
U.S., and also becomes the third-largest maker of uncoated
freesheet paper in North America. It operates eight paper mills
and 98 corrugated products plants and related facilities.
At the time the deal was announced, management said when
combined with Boise, PCA's containerboard capacity would increase
to 3.7 million tons from its then-current level of 2.6 million
tons, or by 42%. PCA's corrugated products volume would increase
by about 30% as a result of the acquisition, and PCA's market
presence would expand into the Pacific Northwest, an area where
it did not previously have a presence.
The Paper Sector
PCA has been "outpacing the broader market, and incremental
capacity from Boise will allow it to sustain that growth
trajectory," Jefferies analyst Philip Ng said.
"Things are moving sideways for the industry, and this
acquisition has significant cost takeout opportunities," he adds.
"PKG is a good operator in terms of creating value and driving
margins and improving profits."
Ng cites the fact that with the consolidation in the industry,
a lot of customers are looking to diversify their supply base.
PCA has been able to win new business because some of the bigger
players have had to walk away from some of the smaller customers
to get synergies, says Ng, while PCA has realized synergies from
PCA is the third largest company by market cap in IBD's Paper
& Paper Products industry group, after International Paper
and Rock-Tenn. On a national level PCA's primary rivals are
International Paper, Rock-Tenn and Georgia-Pacific.
PCA is one of two paper and packaging companies that are
currently on the IBD 50 growth stock list.KapStone Paper &
), the other name, is a regional player that has benefited from
rising containerboard prices in the industry. KapStone was
profiled in IBD's The New America
on March 18.