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Boise Inc. (BZ) Buyout Is a Bonanza for Packaging Corp Of America (PKG)

Packaging Corp Of America (NYSE:PKG) is buying Boise Inc. (NYSE:BZ), and investors are cheering.

Shares of Boise Inc. (NYSE:BZ) are up more than 26% on news that Packaging Corp. intends to pay $12.55 per share to acquire its rival paper products manufacturer. (Indeed, at $12.57 per share at last report, they’re trading for more than Packaging Corp Of America (NYSE:PKG) is offering to pay.) Even more incredibly, Packaging Corp. shares are enjoying a rally of their own, up more than 8% on the news.

And for good reason.

Packaging Corp Of America (NYSE:PKG)

Value is in the eye of the acquirer
Sure, if you look at the buyout one way, Packaging Corp. appears to be overpaying for Boise Inc. (NYSE:BZ). Packaging Corp Of America (NYSE:PKG)’s target earns so little profit on its sales (less than 0.6%) that its P/E ratio post-announcement has skyrocketed to 92 — nearly 4 times the P/E at Packaging Corp.

But viewed the right way, it’s clear that Packaging Corp Of America (NYSE:PKG) is actually getting a steal of a deal here. With $2.5 billion in annual sales, Boise is agreeing to sell itself for just a 0.5-times sales valuation. That’s a steep discount to the 1.75 times price-to-sales ratio that Packaging Corp.’s own shares command. And of course, Packaging Corp. itself is only a little bigger than Boise Inc. (NYSE:BZ) in terms of annual revenue — $3 billion in annual sales, versus Boise’s $2.5 billion. When you’re a company valued at close to $5.8 billion, a chance to take over — and take out — a rival operator for an acquisition cost of just $1.3 billion, is an opportunity too good to resist.

Go ahead. Unwrap this package.
And so … Packaging Corp Of America (NYSE:PKG) is not resisting. It’s gobbling up a rival. And granted, Boise Inc. (NYSE:BZ)’s not a terribly profitable rival as GAAP accounting standards for such things. But the company has a lot more to offer than just GAAP accounting fictions. First and foremost, Boise Inc. (NYSE:BZ) has annual cash production of nearly $94 million — nearly 7 times its reported GAAP net income.

Combined with the $397 million in free cash flow that Packaging Corp Of America (NYSE:PKG) produced over the past year, this should make for a box-making giant churning out at least $491 million in FCF annually post-merger, and potentially more than that if the acquirer can wring some cost efficiencies out of the transaction.

Foolish takeaway
At a post-announcement valuation of $5.8 billion, what this all means is that Packaging Corp. appears to be on course for a valuation of less than 12 times FCF post-merger. If it can grow its profits at only the 12% rate analysts were projecting for it, solo, pre-merger, that’s a very fair valuation to pay for the merged company. If Packaging Corp. can wrangle any part of the turbocharged 20% profits growth potential that analysts see for Boise, though, and use that to boost its combined earnings going forward, the stock could very well be a steal.

The article Boise Buyout Is a Bonanza for Packaging Corp. originally appeared on is written by Rich Smith.

Fool contributor Rich Smith and The Motley Fool have no position in any of the stocks mentioned. 

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