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Rock-Tenn to Buy Simpson Tacoma Kraft Paper Mill

Zacks Equity Research

Rock-Tenn Company (RKT) announced that it will acquire Simpson Tacoma Kraft Paper Mill located in Tacoma, Wash. from Simpson Lumber Company LLC, for $343 million. The transaction is subject to customary closing conditions and regulatory approvals.

The mill has two paper machines and two pulp dryers that make various paper grades including containerboard, specialty kraft paper and pulp. In 2013, the mill clocked total production of 465,000 tons. The Tacoma Kraft Mill also operates a 55-megawatt green biomass fuel cogeneration facility and sells electricity under a long-term contract. During the next three years, RockTenn intends to invest $60 million in the mill and has entered into a 7-year wood chip supply contract with Simpson Lumber Company.

The purchase price of $343 million reflects an earnings before interest, taxes, depreciation, and amortization (:EBITDA) multiple of less than 6 times of the mill's financial results for the year ending Dec, 2013 and the expected operating efficiencies.

Rock-Tenn reported upbeat first-quarter fiscal 2014 (ended Dec 31, 2013) earnings on Jan 28. Adjusted earnings per share jumped 23% year over year to $1.66 from $1.35 in the year-earlier quarter. Total revenue increased 3.3% year over year to $2,362.6 million, driven by higher pricing, partly offset by reduced volume.

RockTenn's strong earnings growth reflects continued improvement in its operating performance. Strong balance sheet and cash flow will help in returning capital to shareholders through dividends and stock repurchases.

For the rest of the fiscal year, RockTenn expects recovered fiber markets to enjoy moderately higher pricing. Rock-Tenn’s investment in box plants, installation of new standard corrugated box operating system and increase in domestic and export pricing will help to boost profitability. The Tacoma Kraft Mill is a strategic fit for RockTenn. Adding a mill in the West Coast will enhance the company’s ability to satisfy its West Coast customers as well as generate significant operating efficiencies across its system.

Norcross, Ga.-based RockTenn is one of the leading integrated manufacturers of corrugated and consumer packaging and recycling solutions in North America. It operates in the U.S., Canada, Mexico, Chile, Argentina and China.

Rock-Tenn currently holds a short-term Zacks Rank #3 (Hold).

Stocks with a favorable Zacks Rank in the paper and packaging industry include Resolute Forest Products Inc. (RFP),  Stora Enso Oyj (SEOAY) and UPM-Kymmene Oyj (UPMKY), all of which hold a Zacks Rank #1 (Strong Buy).

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