Sonoco Products Co. (SON) entered into an agreement to acquire Tegrant Corporation from Metalmark Capital for a cash consideration of $550 million. The acquisition is expected to close in November 2011 pending regulatory reviews.
The purchase consideration, adjusted for expected tax benefits, equals 6.8 times Tegrant’s estimated pro forma 2011 Earnings Before Interest, Tax and Depreciation and Amortization of approximately $74 million.
The acquisition will be funded from the company’s cash and debt. Sonoco ended the second quarter with cash and cash equivalents of $133 million and a debt balance of $716 million. Sonoco, however, intends to deploy its free cash flow to bring down its debt level.
Tegrant when added to Sonoco’s portfolio, the combined entity is estimated to generate sales of approximately $5.0 billion in 2012. Sonoco estimates synergies of $11 million over the next year by virtue of logistics optimization, material sourcing, facility and corporate integration, and research and testing facility integration. Tegrant is estimated to generate sales of $400 million in 2011.
The acquisition is also expected to be accretive to Sonoco’s 2012 earnings by 10 cents per share. The Zacks Consensus Estimate for 2012 is $2.66 per share.
The acquisition not only marks the largest in the company’s history but also will position it as the leader in multimaterial protective packaging in North America. Further, the combined Protective Packaging business is projected to contribute 11% to Sonoco’s 2012 sales, a jump from only 2% in 2011.
The company has remained focused on growing its consumer oriented businesses more than its industrial businesses. This acquisition, thus, not only complements its growth plans, but also enables it to grow its industrial businesses as well.
In the second quarter earnings conference call, Sonoco guided third quarter 2011 earnings in the range of 64 cents to 68 cents per share; while full year earnings were guided in the range of $2.46 to $2.54 per share.
The Zacks Consensus Estimate for third-quarter 2011 is 64 cents per share. For full year 2011, the Zacks Consensus Estimate is $2.44 per share.
We retain our Neutral recommendation on Sonoco Products Co. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the stock over the near term.
Headquartered in DeKalb, Illinois, Tegrant Corporation is a leading provider of highly engineered protective, temperature-assured and retail security packaging solutions. Tegrant operates three business units. Protexic Brands, ThermoSafe Brands and Alloyd Brands.
Based in Hartsville, South Carolina, Sonoco is a global manufacturer of consumer and industrial packaging products, as well as recycled paperboard. The company competes with Bemis Company Inc. (BMS) and Rock-Tenn Co. (RKT).
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SONOCO PRODUCTS (SON): Free Stock Analysis Report
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