KapStone Paper & Packaging Corp. (KS, Financial) has announced the company’s agreement to acquire the assets of Victory Packaging in a deal valued at approximately $615 million.
KapStone Paper is an American pulp and paper company formed in April 2005 by industry veterans to launch operating businesses in the paper and related industries. Headquartered in Northbrook, Illinois, with nearly 4,700 employees, KapStone is a leading North American producer of unbleached Kraft paper and corrugated packaging products.
The deal
KapStone has agreed to buy privately held Victory Packaging in a debt-free transaction for around $615 million in cash, in order to increase the utilization of the company’s assets and mills.
Additionally, if certain performance targets are met, two contingents earn-outs totalling $45 million are possible between two and a half to four years after the closing of the deal and also taking into account that the venture goes on continuously without any uncharted hiccups.
Victory Packaging is a privately-held limited partnership company and a leading national distributor, based in Houston, TX. With more than 65 warehouses and distribution facilities in the United States, Canada and Mexico, Victory Packaging specializes in solving packaging difficulties and finding total cost optimization related with packaging for its customers. The company offers just-in-time delivery and inventory management to a varied customer base. Victory Packaging’s national network consists of above 6 million square feet of warehouse space, around 400 delivery vehicles and nearly 1,500 employees. It operates in California under the company name of Golden State Container.
According to the company’s press release, the transaction is presumed to add to KapStone’s bottom line directly, while producing major cost savings. The arrangement of the transaction will allow KapStone to get a tax exemption of about $100 million according to present value calculations, which will make the net value of acquiring Victory Packaging to be around $515 million.
The transaction, which is expected to close in the second quarter of 2015, is subject to regulatory review and a number of other customary conditions.
Aftereffects of the acquisition
The acquisition of Victory Packaging is assumed to be a giant step for KapStone as it expects to transform into a much stronger company, with Victory providing added momentum for KapStone to continue its record of excellence in increasing value to the company’s shareholders.
Victory provides services to customers with intricate needs, which are mostly not very attractive to other integrated box manufacturers.
According to Roger W. Stone, Chairman and Chief Executive Officer of KapStone, “the acquisition of Victory Packaging will present KapStone with growth opportunities based on Victory's notable, lucrative track record. It will allow KapStone to de-risk processes by providing an elevated level of integration. Victory is a distinctive strategic fit that will concurrently boost utilization of the company’s convertible assets and mills. KapStone’s balance sheet would supposedly be as strong after the acquisition as it is before the deal. The combined entity is expected to deliver considerable amount of free cash flow in the first year of unification, allowing KapStone to rapidly de-lever”.
Currently, Victory Packaging buys about 370,000 tons of corrugated products yearly of which KapStone is looking ahead to supply an incremental 115,000 tons. Victory will still depend majorly on their existing supplier base to fill the rest.
According to KapStone’s estimation, these synergies are expected to reach $30 million of EBITDA in 24 months. The deal is accretive to the company’s main strategy right from the start.
Investor take
For the year ended December 31, 2014, Victory's net sales grew to $953 million and adjusted EBITDA reached $55 million, and the CAGR for both net sales and adjusted EBITDA was in excess of 14% for the previous four years.
KapStone Paper last announced its results on February 9th 2015. The company reported $0.41 EPS for the quarter, as compared to $0.45 EPS during the same quarter in 2014. The company had revenue of $563.00 million for the quarter, compared to the consensus estimate of $576.90 million. Analysts expect the company to post $2.09 earnings per share for 2015 fiscal year. Whether the acquisition of Victory will help the company make a bigger comeback and help Kapstone exceed expectations that remain to be seen over the times to come.
