Sonoco Products Co. (SON) has completed the acquisition of Tegrant Corporation, a leading provider of highly engineered, protective, temperature-assured and retail security packaging solutions, from Metalmark Capital, for $550 million. The acquisition is not only the largest in the company’s history but will position it as the leader in multimaterial protective packaging in North America.
Headquartered in DeKalb, Illinois, Tegrant operates three business units – Protexic Brands, ThermoSafe Brands and Alloyd Brands. Protexic Brands is North America’s premier manufacturer of molded expanded foam and serves varied industries including high technology, consumer electronics, automotive, appliances and medical devices.
ThermoSafe Brands is the world’s leading provider of temperature-assured solutions, primarily used in packaging temperature-sensitive pharmaceuticals and food. Alloyd Brands is a leading manufacturer and designer of high-visibility packaging, printed products and blister packaging machines for retail and medical markets.
On its part, Sonoco’s existing protective packaging business is a leading provider of custom-designed paper-based packaging solutions for household appliances, heating and air conditioning units, home and office furniture, lawn and garden equipment, and a variety of other consumer products.
The business commands leading positions in fast growing markets, including medical devices, pharmaceuticals, automotive components and health and beauty products. With nearly 40 manufacturing, design and testing facilities in the United States, Mexico, Puerto Rico and Ireland, the business generates annualized net sales of around $540 million. With the acquisition, Sonoco will form a new Protective Packaging segment.
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 $2.55 per share. Further, the combined Protective Packaging business is projected to contribute 11% to Sonoco’s 2012 sales, a jump from only 2% in 2011.
Sonoco ended the third quarter with cash and cash equivalents of $146 million, debt balance of $717 million and debt-to-total-capital ratio of 32%. To fund the acquisition, Sonoco recently issued $500 million of new senior unsecured notes. The issue consisted of $250 million of 4.375% Notes due 2021 and a reopening of its 5.75% Notes due 2040 for $250 million.
The company has remained focused on growing its consumer oriented businesses more than its industrial businesses. This acquisition not only complements its growth plans, but also enables it to grow its industrial businesses.
We believe Sonoco’s strategy to grow through acquisitions, potential restructurings and increased focus on emerging markets will certainly bring long-term benefits. However, raw material inflation, high customer concentration and a still fragile construction industry will affect its financial results in the near term. We retain our Neutral recommendation on Sonoco Products Co. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
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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