Greif's Acquisition Of Caraustar To Boost Margins & Sales

Greif, Inc. (NYSE:GEF) has entered into a definitive agreement to acquire Caraustar Industries, Inc. from an affiliate of H.I.G. Capital for $1.8 billion. The buyout will help strengthen Greif’s leadership in industrial packaging, and will significantly boost its margins, free cash flow and profitability.

Based in Austell, GA, Caraustar is a recycled paperboard and packaging products maker. Caraustar produces uncoated recycled paperboard (URB) and coated recycled paperboard (CRB), and has more than 80 plants, warehouses and recycling centers in the United States. Caraustar posted revenues of $1.4 billion for the year ended Sep 30, 2018, and EBITDA of $174 million.

Benefits of the Acquisition

The Caraustar acquisition is a strategic fit for Greif. Caraustar is vertically integrated in recycled paperboard manufacturing which will also fortify, and balance Greif's portfolio and expand its paper franchise.

The buyout will immediately add to Greif's earnings, and will result in more than $45 million in annual savings within three years through consolidation, transportation and procurement improvements and other initiatives. The deal is expected to increase Greif's portion of sales from the United States to roughly two third of total consolidated sales. Notably, Greif generates approximately half of its revenues from the United States. In addition, the percentage of Greif's sales from paper packaging will expand to approximately half of total consolidated revenues compared to 23% for fiscal 2018.

The transaction, which is expected to close during first-quarter of calendar-year 2019, subject to customary closing conditions, will generate annual run-rate cost synergies of at least $45 million within 36 months of closing.

Key Issues of the Deal

Greif's shares dropped around 18% to close at 34.48 yesterday after Moody's Investors Service, put its rating for Greif under review for downgrade. This is due to the significant incremental debt associated with the acquisition as well as change in risk profile and the integration risk inherent in the transaction.

Notably, Greif's expected leverage ratio at the closing of the transaction will be approximately 3.5x. However, the company expects to return to within its targeted leverage ratio range of 2-2.50x within 36-48 months. Lengthy pass through for raw-material price increases and lack of pass through for other costs were also reasons for the downgrade.

Share Price Performance

Over the past year, shares of Greif have lost around 44% compared with the industry’s decline of 18%.

Zacks Rank

Greif currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same sector include DMC Global Inc. (NASDAQ:BOOM) , CECO Environmental Corp. (NASDAQ:CECE) and W.W. Grainger, Inc. (NYSE:GWW) . All these stocks sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

DMC Global has a long-term earnings growth rate of 20%. The stock has surged 60% in a year’s time.

CECO has a long-term earnings growth rate of 15%. The company’s shares have gained around 37% during the past year.

Grainger has a long-term earnings growth rate of 12.4%. Its shares have been up 17% in the past year.

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