Transcontinental Boosts Packaging in $1.32 Billion Coveris Deal

(Bloomberg) -- Transcontinental Inc., Canada's biggest printer, agreed to buy Coveris Americas for $1.32 billion to bolster its packaging unit as the company pivots away from its business supplying the shrinking newspaper industry.

After the acquisition, packaging, bags and labels will make up the largest segment at Montreal-based Transcontinental, which has seen declines in its newsprint sales. Coveris, with 2017 revenue of $966 million and about 3,100 employees, has more than 3,500 customers and operations in the Americas, U.K. and Asia.

The new assets will strengthen Transcontinental's competitive position in markets such as dairy products and pet foods, and provide entry into new industries such as agriculture and beverages, Chief Executive Officer Francois Olivier said Monday. Since making its first packaging acquisition in 2014, Transcontinental has been working to become a North American industry leader as it reduces its exposure to print media by selling assets such as consumer magazines.

The deal “positions us long term as a stronger consolidator of the industry,” Olivier told analysts Monday on a conference call. “For now, our focus will be on integration and deleveraging.”

Transcontinental's widely traded Class A stock rose 8.5 percent to C$27.60 at 10:27 a.m. in Toronto Monday. Earlier the shares soared as much as 16 percent, their biggest intraday gain since April 2009.

Debt Increase

Net debt will represent 3.2 times earnings before interest, taxes, depreciation and amortization once the deal closes in the third quarter of the current fiscal year, Chief Financial Officer Nelson Gentiletti said on the call. That ratio will probably drop to 2 times by the end of fiscal 2020 as the new assets generate strong cash flow, he said.

Transcontinental expects its acquisition of Chicago-based Coveris Americas to boost adjusted profit immediately upon closing, Gentiletti also said. Transcontinental has identified potential annual cost savings of about $20 million over the first two years of ownership, he said.

Revenue Outlook

When factoring in the Coveris assets, Transcontinental's pro-forma 2017 revenue will climb to C$3.3 billion ($2.6 billion), with earnings before interest, taxes, depreciation and amortization rising to C$564 million, Olivier said. The company will have about 9,000 employees.

The deal will triple packaging's share of revenue at Transcontinental to 48 percent of overall sales, the company said Monday in a slide presentation. The U.S. and Canada generate 80 percent of Coveris' revenue, the CEO said. Coveris has invested about $140 million in its 21 plants in the last three years, Olivier said, adding that he personally visited “the lion's share” of the facilities in recent months.

The deal will be financed by cash on hand and loans from Canadian Imperial Bank of Commerce and Bank of Nova Scotia. Coveris Americas is owned by Coveris Holdings SA, a unit of private equity firm Sun Capital Partners Inc. Transcontinental was advised by Bank of Montreal and JP Morgan Chase & Co.

Bemis Co. and Sealed Air Corp. are the two biggest makers of flexible packaging in North America, according to a slide presentation posted Monday on Transcontinental's website. Transcontinental would rank seventh once the Coveris Americas deal has closed, according to the presentation.

To contact Bloomberg News staff for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, David Scanlan at dscanlan@bloomberg.net, Susan Warren

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With assistance from Frederic Tomesco