Smurfit Kappa Agrees to Buy Orange County Container for $340 Million

Sept. 24, 2012 - Smurfit Kappa Group plc announces that it has agreed to acquire Orange County Container Group (the “Business” or “OCCG”) for a total cash consideration of US$340 million (c. €260 million) (the “Transaction”). OCCG is a private corrugated and containerboard manufacturer with operations in Northern Mexico and the Southern United States (“US”). OCCG employs 2,800 people (2,000 of whom are employed in Mexico), and is expected to generate US$53 million of EBITDA for the full year (“FY”) 2012. OCCG’s strong strategic fit with SKG’s existing businesses is expected to deliver at least US$14 million of synergies by the end of year 2.

The US$340 million cash consideration will be funded from the Group's existing cash resources. It is anticipated that the Transaction will complete in the fourth quarter of 2012 subject to customary completion conditions and regulatory approval, and is expected to be EPS accretive on completion.

Gary McGann, Smurfit Kappa Group CEO, said: "We are pleased to announce our agreement to acquire Orange County Container Group. We look forward to welcoming the excellent team from OCCG into the Smurfit Kappa Group and we are confident that their skills and expertise will complement those of our colleagues in the relevant markets. The acquisition delivers immediate earnings growth for SKG and significantly strengthens our existing position in the Mexican market.

"The continued strength of our operating performance and consequent net debt reduction has increased the range of strategic and financial options for the Group. The acquisition of OCCG provides a complementary portfolio of well-invested assets and quality people. This transaction further increases the contribution of our existing successful Latin American business; providing us with a very significant position within the key Maquiladora trading region and substantially strengthening our position in the higher growth Mexican market.

"SKG has a proven track record of identifying, acquiring and integrating businesses. This Transaction creates synergies for the Group delivering value and earnings growth for our shareholders.”

Orange County Container Group | Scope of the Transaction

  • 8 main packaging facilities in Mexico comprising 2 box plants, 3 sheet plants and 3 fulfilment centres
  • 7 distribution centres in Mexico
  • 2,800 employees (2,000 in Mexico; 800 in the United States)
  • 2 packaging facilities in the southern part of the United States comprising 1 box and 1 sheet plant
  • A 290,000 tonne recycled containerboard mill in the southern part of the United States
  • A substantial US based recovered paper collection system

About Orange County Container Group
OCCG is a leading integrated packaging manufacturer operating in Northern Mexico and the Southern United States. OCCG produces, markets and sells high graphics and conventional corrugated containers, as well as point-of-purchase displays. The Business also produces 290,000 tonnes of recycled containerboard on two paper machines in Dallas. It operates seven wholly owned recycling centres in Texas, Oklahoma and Arkansas, which is a significant strategic resource and provides security of supply of recovered paper for the mill and of containerboard for the corrugated operations.

OCCG employs approximately 2,800 people of which 2,000 are based in Mexico and 800 are based in the US. OCCG has a proven strong management team and a quality workforce that will transfer to SKG with the acquisition of the business and will add to the skill base within SKG.

EBITDA, before synergies, for the 12 months to December 2012, for OCCG is expected to be US$53 million. The Business has well maintained and well invested assets following a capital investment programme of over US$85 million in the past 4 years. The gross assets of the Business being acquired are approximately US$325 million, and the profit before tax for the year to December 2011 was US$6.3 million.

Rationale for the Transaction
The Transaction is strategically and financially attractive for SKG. The Group has a proven track record of identifying, acquiring and integrating businesses and OCCG significantly strengthens SKG’s position in Mexico and gives the Group a small position in an increasingly consolidated US market. The Transaction is expected to be earnings accretive on completion. The Group has identified a range of operational synergies. There is also significant scope to transfer some of the Group’s European recycled containerboard and corrugated innovation and production experience to the OCCG mill and corrugated operations. With the acquisition of a significant recovered paper system in the southern part of the US the Group increases its “grip” on substantial tonnage of this increasingly important raw material, thereby under-pinning the security of our raw material and paper supplies to our expanding Mexican packaging business.

Specifically, the Transaction delivers a range of strategic and financial benefits for SKG including:

  • Further strengthens SKG’s position in higher growth markets
    • SKG’s containerboard and corrugated Mexican business includes three paper machines and nine box plants with containerboard production of approximately 295,000 tonnes and corrugated shipments of 500 million square metres for the 12 months to June 2012
    • Complements SKG’s Mexican business with limited customer or geographic overlap
    • Provides SKG with a pro-forma total market share of approximately 17% of the Mexican market
  • Enhanced geographic diversity, with SKG’s non-European exposure expected to increase from 23% to 26% of Group EBITDA
  • OCCG’s integrated model provides security of supply and consistency of service to packaging customers — particularly under-pinned by a substantial level of “grip” on recovered paper supply
  • OCCG comprises well invested assets and well run businesses delivering strong growth
  • Synergy benefits of at least US$14 million expected within two years
  • Pro-Forma FY 2012 multiple of 6.4x before synergies (5.1x after synergies)
  • Expected returns for SKG shareholders are attractive – earnings accretive on completion
  • Transaction funded through SKG’s existing cash resources
  • SKG’s 2012 year-end net debt to EBITDA multiple post completion is expected to be well within the Group’s stated target of less than 3 times

Assets
The Group is acquiring OCCG and its assets including its production facilities; recycling centres; brands, trademarks; and customer contracts. The employees in the Business will transfer to the Group. The Group will not assume tax or pension liabilities or financial indebtedness. The consideration is US$340 million payable in cash on completion.

Transaction Financing
The Transaction will be financed from the Group’s existing cash resources and represents a highly effective use of some of SKG’s cash balances. Following the transaction, SKG’s 2012 year-end net debt to EBITDA multiple is expected to be well within the Group’s started target of less than 3 times.

The acquisition of OCCG will have no impact on the Group’s stated dividend policy which is to pay interim and final dividends in October and May in each year in the approximate proportions of one third and two thirds and to progressively improve the dividend payout when earnings support it.

Synergy Benefits
The Group has identified synergies of at least US$14 million and it is currently expected that these will be delivered by the end of year 2. The synergy benefits primarily relate to the optimisation of the combined businesses using the SKG benchmarking methodology and optimising the efficiencies and productivity of the various operations by implementing best practices.

The Group is the leading producer of recycled containerboard in Europe and the transfer of some of SKG’s European recycled containerboard production experience and expertise will enhance the efficiency and production capability of OCCG’s mill. In the packaging business the applications of SKG’s bespoke innovation tools and operational excellence methodologies is expected to enhance the efficiency and quality of earnings of the combined businesses.

Integration
It is expected that the Transaction will be completed in the fourth quarter of 2012. The OCCG business will then be progressively integrated with the Group’s operations in Mexico.

SOURCE: Smurfit Kappa Group