Berry Plastics To Expand In North America With AEP Buyout

In a bid to expand its presence in North America, Berry Plastics Group, Inc. (NYSE:BERY) has decided to acquire leading plastic packaging films manufacturer, AEP Industries Inc., for $765 million (including debt). The share price of Berry Plastics hit a 52-week high of $45.87 on Aug 25, on the news before closing a tad lower at $45.39, up 4.88% in a day.

The transaction is expected to be completed in the fourth quarter of 2016, pursuant to the approval of AEP shareholders and customary closing conditions, including regulatory approvals.

Headquartered in Montvale, NJ, AEP manufactures and sells various flexible plastic packaging products for consumer, industrial, and agricultural applications through its 14 manufacturing facilities in the U.S and Canada. It has a total workforce of around 2,600. For the year ended Apr 2016, AEP generated net sales of $1.1 billion, net income of $39 million, and adjusted EBITDA of $103 million.

BERRY PLASTICS Price

BERRY PLASTICS Price | BERRY PLASTICS Quote

Financials of the Deal

Based on Berry Plastics' closing price on Aug 23, AEP shareholders will have the choice to receive either $110 in cash or 2.5011 shares of Berry Plastics for each share held in AEP. Upon closing of the deal, AEP shareholders will own approximately 5% of Berry Plastics on a fully diluted basis.

Expected Benefits

Armed with one of the most comprehensive product portfolios in the industry and an expanded North American base, Berry Plastics will be in a better position to serve its customers. Following the acquisition, the company will be able to optimize complementary production capacities as well as cut down material and conversion costs. The company eyes cost savings through procurement initiatives, operational improvements, adopting best operational practices, improved asset utilization, and logistics optimization across the combined plant network.

Annual cost synergies from this transaction are projected to be $50 million. The deal is expected to be accretive to Berry Plastics’ adjusted net income and adjusted free cash flow by more than 10%, after expected synergies. On a pro-forma basis, Berry Plastics’ four quarters (ended Jun 2016) adjusted free cash flow would rise by $85 million to $560 million.

Last October, Berry Plastics completed the acquisition of specialty materials producer, AVINTIV Inc. The deal is considered transformational for Berry Plastics by cutting down its dependence on packaging, and moving it into the fast-growing health and hygiene markets. The deal also provided it with a significant presence outside North America. The returns from the AVINTIV acquisition continue to exceed Berry Plastics’ initial expectations. The company initially announced $50 million of cost synergies from the AVINTIV buyout. However, it raised this estimate to $65 million and eventually to $80 million in the first and second-quarter 2016 earnings calls. It expects that further future synergies will be achieved from information technology integration and new commercial revenue opportunities.

Berry Plastics continues to be optimistic about healthcare, pharmaceuticals, personal care and food packaging growth opportunities outside North America, especially in Asia and Latin America. The company predicts per capita consumption increases to boost organic growth in the regions.

Moreover, the company will continue to take the necessary proactive steps to remain competitive and lead the markets where it operates.

Berry Plastics currently sports a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the sector include Packaging Corporation of America (NYSE:PKG) , ACCO Brands Corporation (NYSE:ACCO) and AO Smith Corp. (NYSE:AOS) . All the three stocks hold a Zacks Rank #2 (Buy).