Rock-Tenn’s Simpson Acquisition Adds to an Already Strong Story

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Rock-Tenn (NYSE:RKT), a leading North American integrated manufacturer of corrugated and consumer packaging, recently announced its intentions to acquire Simpson Tacoma Kraft Paper Mill in Tacoma, Washington from Simpson Lumber Company (SSD) for $343 million. The mill houses two paper machines that produced 465,000 tons of paperboard last year. RKT will invest $60 million for the next 3 years in the mill and has also entered a 7-year wood chip supply contract with SSD. Although the deal is subject to customary closing conditions and regulatory approvals, the market share increase for RKT is not large enough to impact the acquisition.The proposed transaction would increase RKT’s North American container board market share to 20.7 percent, which is an increase of ~1 percent from current market share of 19.7 percent.

The price paid reflects less than 6x EBITDA post deal synergies and 1x sales. The deal is seen as an “asset purchase” by the company. RKT expects that majority of synergies from the purchase would be from freight savings and are likely to be realized in one year. Part of the synergies is expected from the lower paper costs and supply chain efficiencies and logistics. According to Barclays estimates, the deal could be ~$0.25 accretive after realization of expected operating efficiencies.

The source through which the acquisition would be financed is still not disclosed by the management. RKT has a underleveraged balance sheet and even if all the acquisition is financed through debt, the company’s leverage would increase from 1.8x to 2.0x only, still in-line with the company’s target of 2.0x. Management may also finance the acquisition through its A/R securitization.

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