Packaging Corporation of America
) has retained the Baa3 credit rating from global credit rating
firm Moody's Investors Service. The Baa3-rating denotes a stable
outlook with a relatively moderate credit risk and adequate
liquidity to meet current financial commitments.
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While reiterating its credit ratings, Moody's has considered
Packaging Corporation's recent agreement to acquire
) in a transaction worth $1.995 billion in cash. The strategic
acquisition will increase Packaging Corporation's containerboard
capacity by 42% to 3.7 million tons. The deal is also likely to
boost the company's corrugated products volumes by 30%.
Moreover, Packaging Corporation will get an upside in major
fields such as mill grade optimization, sales mix and cost
reductions, lower transportation costs, corrugated products
optimization and SG&A cost reductions. The company is
expected to generate a pre-tax benefit of approximately $105
million from these arenas within three years of the deal's
closure. Packaging Corporation expects to use the cash flows
generated from the combined companies to repay debt as well as
return value to shareholders.
The Baa3 credit rating signifies Packaging Corporation's
increased market presence post-merger. Moody's also expects
continued good operating and financial performance by seamless
integration of 5 packaging mills and 3 paper mills. These mills
produce premium category products that are likely to yield high
Post-acquisition, Packaging Corporation's pro forma leverage
(debt/EBITDA) will increase to 3.4x (excluding synergies) from
1.9x as of Jun 30, 2013. Pro forma debt is set to increase almost
two-fold to $3.2 billion from $1.2 billion as of Jun 30, 2013.
The combined company is anticipated to generate strong free cash
flow of about $150 million in the first 12 months of combined
operations to reduce leverage to 2.5x - 3x over the next 12-18
Headquartered in Lake Forest, IL, Packaging Corporation is the
fourth largest containerboard producer in the U.S. The company
manufactures several corrugated packaging products, including
conventional shipping containers used to protect the goods.
Packaging Corporation currently has a Zacks Rank #3 (Hold). Some
better-performing stocks in the consumer goods sector include
Sealed Air Corp.
Sonoco Products Co.
), both carrying a Zacks Rank #2 (Buy).