Source: International Paper Investor Roadshow/ SEC Filings, RISI, IP Analysis
Packaging Corporation of America (PCA), the fourth-largest U.S. producer of corrugated shipping boxes, recently agreed to buy Boise (BZ) Inc. for about $1.27 billion in cash, a move that will add to PCA’s capacity in the Pacific Northwest and in Europe. PCA will pay $12.55 a share, 26 percent over Boise’s Sept. 13 closing price, in a deal that also includes $714 million of Boise’s debt (based on SEC filings, this sum would appear to be Boise’s entire long-term debt). The two companies say the purchase will be complete in the fourth quarter of this year.
PCA says the takeover will increase its container board production capacity by 42%, to 3.7 million tons a year. PCA also forecasts pretax savings of $105 million within three years of the deal’s completion from lower transportation costs, and various synergies, especially in the SG&A area.
Boise owns mills, production facilities and distribution centers in North America and Europe. While Boise’s packaging business is the focus of the news, the Idaho company is also a major manufacturer of office papers and of newsprint; in uncoated free sheet (UFS), Boise produced 1.25 million short tons of product in 2012. Like other North American paper manufacturers, Boise has done well in managing its capacity utilization. With the recent closure of its UFS mill in St. Helens, Oregon, Boise is achieving a 98% operating rate at its remaining three UFS mills.
In packaging, which accounts for the majority of Boise’s production and revenues, the company manufactures and sells linerboard and corrugating medium (the two raw components of containerboard), finished containerboard, corrugated containers, protective packaging, and corrugated sheets. For 2012, Boise reported $1.13 billion in sales for its packaging segment, with income before interest and taxes of $102 million. Boise claims over 5,000 customers in its packaging segment, where the company is also a major converter: Boise says that in 2012 it used approximately 84% of its containerboard production (both linerboard and corrugating medium) in its own converting operations, selling the balance of linerboard in the domestic and international open markets. Its 2012 tally of approximately seven billion square feet of corrugated container production went to diverse mix of customers in food, beverage, paper, glass, ceramics, electronics, and many other industries. Boise’s production of protective packaging is extra to that, serving a similarly diverse list of customers, and benefiting from recent acquisitions of protective packaging producers Hexacomb and Tharco.
The news story from PCA and Boise highlights the attractiveness of the packaging media and products business, and its tendency to consolidate vendors. At the same time, an unheralded part of the deal is Boise’s business in office papers, where Boise is a major manufacturer of printing and writing grades and has a well-known brand. These assets are a valuable part of the purchase, but not a fit for PCA, since that part of Boise is quite separate from the core mission of PCA. In fact, PCA’s press release announcing the acquisition does not even mention Boise’s extensive paper business. What could be the resolution? Big paper industry players such as International Paper, NewPage and Domtar could purchase Boise’s office papers business (and its newsprint business), but likely will not. One reason is that there is an excess of capacity in North America, symbolized by IP’s recent closure of its Courtland, Alabama mill and by the downturn in newsprint volumes generally. Another reason is that such large players might run into regulatory hurdles, due to government concern about industry concentration. NewPage in particular is not in a financial position for such an acquisition. Meanwhile, for smaller players such as Georgia Pacific, both market conditions and the cost of such a purchase would be hurdles. While an acquisition by a European paper company such as Sappi, Mondi, or Stora Enso, seeking to increase their share of the North American market, is slightly more likely, the willingness of these companies to invest in a declining UFS market is also problematic. A likelier and likely better resolution: A spin-off of the office paper / printing-and-writing paper business, creating a separate, free-standing relatively debt-free company, one that, with investment, could stay competitive long term.