Morningstar | No-Moat Orora Completes North American Packaging Distribution Bolt-On Acquisition; FVE Increased 4%
No-moat Orora has acquired Pollock, a Texas based packaging and facility supplies business for USD 80.5 million. After factoring in deal synergies, the deal looks respectable at roughly 7 times our fiscal 2019 EBITDA forecast for Pollock. We see the deal as shareholder accretive, provided stated synergies can be realised, with the deal adding AUD 0.05-AUD 0.10 per share of value, depending on the extent to which the USD 6 million in stated revenue and cost synergies can be realised by Orora. We increase our fair value estimate by 4% to AUD 2.50 per share but note that Orora shares continue to screen as expensive at 1.3 times fair value estimate.The transaction makes sense given Orora’s strategy to dramatically increase the scale of its North American distribution business by rolling up the highly fragmented industry. However, shareholder value creation under the deal rests squarely on Orora’s ability to extract the stated USD 6 million in deal synergies. Both cost and revenue synergies have been identified. While a detailed breakdown of synergies has not been provided by Orora, we suspect around USD 3 million of these are cost related and thus have a high probability of being realised. We therefore factor in USD 3 million in synergy realisation over the coming three years, adding AUD 0.05 per share of value for Orora shareholders. We note, however, that should no synergies be realised, the deal adds no value.
To assist with funding of the acquisition, we expect net debt to increase marginally in fiscal 2019 to AUD 750 million, up from AUD 670 million at fiscal 2018 year-end. The balance sheet remains healthy, however, with net/debt to EBITDA of 1.5 expected at fiscal 2019 year-end. Interest coverage continues to look comfortable following the acquisition and will average around 8 times over the coming five years.
Orora is engaged in providing a range of packaging solutions. Co.'s operating segments include: Orora Australasia, which focuses on the manufacture of fibre and beverage packaging products within Australia and New Zealand, and its manufactured products include glass bottles, beverage cans, wines closures, corrugated boxes, cartons and sacks, and recycled paper; and Orora North America, which primarily located in North America, is engaged in purchasing, warehousing, selling and delivering a range of packaging and other related materials, and its business also includes integrated corrugated sheet and box manufacturing and equipment sales capabilities.
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