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Smurfit eyes profit boost after $340m deal for packaging firm

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Smurfit chief Gary McGann: 'driven out net debt down'

Smurfit chief Gary McGann: 'driven out net debt down'

Smurfit chief Gary McGann: 'driven out net debt down'

Irish packaging group Smurfit Kappa is paying $340m (€260m) to buy California-headquartered Orange County Container Group (OCCG). It's the group's single biggest acquisition since Jefferson Smurfit merged with Dutch firm Kappa in 2005.

Privately held, OCCG operates eight main packaging facilities in northern Mexico, as well as seven distribution centres in the country. It also has two packaging facilities in southern California and a recycled container board mill in Dallas. It owns recycling centres in Texas, Arkansas and Oklahoma.

Smurfit Kappa, which is the largest packaging manufacturer in Europe, expects the acquisition of OCCG to be immediately accretive to its earnings per share once the transaction is completed.

OCCG will generate earnings before interest, tax, depreciation and amortisation (EBITDA) this year of about $53m. It will have sales of about $550m in 2012.

Speaking to the Irish Independent, Smurfit Kappa chief executive Gary McGann said that the company's recent debt restructuring at very attractive interest rates was coincidental. He said the group had already guided the market to expect that the company would make some sort of a sizeable acquisition.

"We've driven our net debt down by strong cash generation," he said, adding that he wanted to ensure those debt levels were at a "comfortable" level before undertaking any sizeable acquisition activity.

"We committed to the market that we would not leverage beyond three times' net debt to EBITDA," he said. "This acquisition will bring us to 2.73 times."

At the end of its second quarter, Smurfit Kappa had net debt of €2.85bn, having reduced it from just over €3bn at the end of the second quarter in 2011. The company is funding the acquisition through existing cash resources.

Smurfit Kappa already has significant operations in Mexico, spread largely across the central and southern areas of the country. Mr McGann said the acquisition would raise Smurfit Kappa's share of the packaging industry in the country from 12pc to 17pc. It will also boost Smurfit Kappa's non-European exposure from 23pc to 26pc of group EBITDA.

He added that Mexico -- where 2,000 of OCCG's 2,800 workers are based -- provides a substantial growth opportunity for Smurfit Kappa given the nation's youthful demographics and rising education levels.

OCCG was founded in 2008 as a result of a merger between two family-owned businesses -- Texas-based Corrugated Services, which was established in 1974, and Los Angeles-based Orange County Container, founded in 1981. The company's customers include a raft of household names in a number of sectors.

Smurfit Kappa expects to generate $14m in synergies within two years of the transaction's completion later this year.

Davy Stockbrokers analyst Barry Dixon said the purchase was likely to boost Smurfit Kappa's annual profits by 8pc "over time".

Shares in Smurfit Kappa closed up 4.1pc at €8.12 in Dublin.

Irish Independent