Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of KapStone Paper and Packaging (KS) were stacking higher today, gaining as much as 20% after announcing it would acquire Longview Paper and Packaging for $1.03 billion.
So what: The deal, which is all cash, constitutes a major purchase for KapStone as before the announcement its market cap was only about $1.4 billion. With only $7.6 million of its own cash on hand, KapStone has lined financing from Bank of America, Barclays, and Wells Fargo for the deal to go through. Acquiring Longview will give KapStone a stronger position in containerboard production, which is used for cardboard, boxes, and KapStone said it expects to see $10 million in cost savings within the first year-and-a-half after closing, which is expected to take place this summer.
Now what: Generally, targets jump like this in acquisitions, not purchasers, so the market clearly likes this decision. Management said the move will help its "bottom line from Day 1" and said its free cash flow contribution would help it pay off the new debt more quickly. Still, I'm concerned about the debt burden KapStone is taking on, as well as the price it paid, which seems steep for a company that generated just $42 million in EBITDA last year. You can keep track of KapStone as it integrates Longview. Just add the company to your Watchlist here.
