Shares of Boise are up more than 26% on news that Packaging Corp. intends to pay $12.55 per share to acquire its rival paper products manufacturer. (Indeed, at $12.57 per share at last report, they're trading for more than Packaging Corp. is offering to pay.) Even more incredibly, Packaging Corp. shares are enjoying a rally of their own, up more than 8% on the news.
And for good reason.
Value is in the eye of the acquirer
Sure, if you look at the buyout one way, Packaging Corp. appears to be overpaying for Boise. Packaging Corp.'s target earns so little profit on its sales (less than 0.6%) that its P/E ratio post-announcement has skyrocketed to 92 -- nearly 4 times the P/E at Packaging Corp.
But viewed the right way, it's clear that Packaging Corp. is actually getting a steal of a deal here. With $2.5 billion in annual sales, Boise is agreeing to sell itself for just a 0.5-times sales valuation. That's a steep discount to the 1.75 times price-to-sales ratio that Packaging Corp.'s own shares command. And of course, Packaging Corp. itself is only a little bigger than Boise in terms of annual revenue -- $3 billion in annual sales, versus Boise's $2.5 billion. When you're a company valued at close to $5.8 billion, a chance to take over -- and take out -- a rival operator for an acquisition cost of just $1.3 billion, is an opportunity too good to resist.
Go ahead. Unwrap this package.
And so ... Packaging Corp. is not resisting. It's gobbling up a rival. And granted, Boise's not a terribly profitable rival as GAAP accounting standards for such things. But the company has a lot more to offer than just GAAP accounting fictions. First and foremost, Boise has annual cash production of nearly $94 million -- nearly 7 times its reported GAAP net income.
Combined with the $397 million in free cash flow that Packaging Corp. produced over the past year, this should make for a box-making giant churning out at least $491 million in FCF annually post-merger, and potentially more than that if the acquirer can wring some cost efficiencies out of the transaction.
At a post-announcement valuation of $5.8 billion, what this all means is that Packaging Corp. appears to be on course for a valuation of less than 12 times FCF post-merger. If it can grow its profits at only the 12% rate analysts were projecting for it, solo, pre-merger, that's a very fair valuation to pay for the merged company. If Packaging Corp. can wrangle any part of the turbocharged 20% profits growth potential that analysts see for Boise, though, and use that to boost its combined earnings going forward, the stock could very well be a steal.
Learn why this deal makes even more sense
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