INTERNATIONAL PACKAGING group Smurfit Kappa is set to buy a US-based rival for €260 million in a deal that will boost earnings and profitability.
The Dublin-listed group said yesterday that it has agreed to buy Orange County Container Group (OCCG) for $340 million (€260 million) in cash.
OCCG employs 2,800 people in manufacturing corrugated containerboard, and has operations in the southern US and in northern Mexico, where most of its business is concentrated.
Smurfit said yesterday that the €260 million asking price will be paid from its cash resources.
OCCG is expected to deliver $53 million in earnings this year. Smurfit said it will fit with its existing operations and will deliver $14 million in savings within two years of its takeover.
The companies expect to complete the deal some time between October 1st and the end of the year, subject to customary conditions and regulators’ approval.
Once the deal goes through, it is expected to add to the packaging group’s earnings. Smurfit Kappa chief financial officer, Ian Curley, said yesterday that combined with its existing operations the OCCG deal will increase its share of the Mexican market to 17 per cent from 12 per cent.
Mexico is the second largest market in central and south America outside Brazil, and is one of the fastest growing in the region.
Smurfit had about €500 million cash on its balance sheet at the end of the first half of this year.
“We are always more cash generative in the second half of the year, and we are using some of that cash to buy something that will add to earnings and create savings,” he said.
On the basis that OCCG will have earnings before tax and write-offs of $53 million this year, that could potentially be worth around $25 million to Smurfit Kappa’s bottom line over a full 12-month period, Mr Curley said.
The group recently refinanced €500 million worth of debt that carried interest of 7.75 per cent.
The move will save it about €10 million a-year in interest payments. Last week, it announced a further €250 million refinancing, which will be through a bond issue.
Barry Dixon and Killian Murphy, analysts with Dublin stockbroking firm, Davy, estimated yesterday that, excluding the OCCG deal, the group’s net debt at the end of this year would be €2.58 billion.
Factoring in the purchase of OCCG, that should leave the group with net debt of €2.8 billion at the end of 2012. The analysts rated the stock as an “outperform” with a target price of €12. It closed at €8.12 yesterday, about 4 per cent up on its opening quote of €7.80.
