Packaging Corporation of America (PCA), Lake Forest, Ill., USA, this week announced that it has entered into a definitive agreement to acquire substantially all of the assets of Sacramento Container Corp., McClellan, Calif., and 100% of the membership interests of Northern Sheets LLC and Central California Sheets LLC in a cash-free, debt-free transaction for a cash purchase price of $265 million. PCA also announced that it will discontinue production of uncoated freesheet (UFS) and coated one-side (C1S) grades at its Wallula, Wash., mill in the second quarter of 2018 to begin the conversion of its 200,000 tpy No. 3 paper machine to a 400,000 tpy, high-performance, 100% virgin kraft linerboard machine. 

The acquisition transaction is structured as a purchase of assets, resulting in a full step-up of the assets to fair market value. Under the terms of the agreement, PCA will acquire full-line corrugated products and sheet feeder operations in McClellan and Kingsburg, Calif.

 

The value of the expected synergies, the tax benefit of the step-up of assets, and the operations’ EBITDA result in a purchase price multiple of approximately five times EBITDA. The acquisition will be accretive to earnings immediately. 

PCA EVP Tom Hassfurther said that "the acquisition of these well-capitalized facilities will further enhance our operations both geographically and strategically. Also, the customer-focused employees and strong management teams of Sacramento Container, Northern Sheets, and Central California Sheets will be an excellent fit with PCA’s culture. This group has built a successful business based on providing outstanding quality and service to a wide array of customers located in the northern and central regions of California."

 

Closing is subject to certain customary conditions and regulatory approval and is expected early in the fourth quarter of 2017. The company plans to finance the transaction with available cash on hand. 

Conversion of the No. 3 paper machine at the Wallula Mill is planned for the second quarter of 2018, with an initial production rate of approximately 60% of capacity. Ultimately, production will increase to 1,150 tpd once a new headbox, forming section, and shoe press are added in the fourth quarter of 2018. The capital cost of the conversion is expected to be approximately $150 million. 

Discontinuing paper operations at the Wallula Mill will result in pre-tax cash severance and other shutdown charges of approximately $20 million - $25 million and approximately $45 million - $55 million of pre-tax noncash asset impairment and accelerated depreciation charges. Charges of $25 million - $35 million are expected to be recorded in the third quarter of 2017. The Mill’s No. 2 paper machine will continue to produce 150,000 tpy of semi-chemical medium. 

PCA Chairman and CEO Mark Kowlzan said that "our strategy is to improve the overall profitability of the paper business for PCA by focusing our people and investments on increasing our competitiveness and ensuring a sustainable future in the office and printing and converting markets with our mills in International Falls, Minn., and Jackson, Ala. In addition, at our current containerboard integration rate of 95%, the low-cost conversion of the No. 3 paper machine at our Wallula Mill provides us with much needed linerboard capacity, allows us to integrate more than 200,000 tons of containerboard to our Sacramento Container acquisition, and enables further optimization and enhancement of our current mill capacity and box plant operations. The conversion will significantly enhance the mill’s profitability and viability." 

Paul LeBlanc, VP–Paper, added that "we will work closely with our customers to ensure a smooth transition as we wind down production of the current grades we make on our No. 3 paper machine at Wallula. Throughout this transition, all customers will continue to receive the high quality products and service they are accustomed to." 

PCA is the fourth largest producer of containerboard and corrugated packaging products and the third largest producer of uncoated freesheet paper in the U.S. PCA operates eight mills and 93 corrugated products plants and related facilities.