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Colorpak to buy Carter Holt carton business

Monday 11th October 2010

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ASX-listed Colorpak is to acquire Graeme Hart's Carter Holt Harvey folding carton assets in Australia and New Zealand for a net A$5 million.  

The acquisition, which requires completion of due diligence and regulatory approval, would lift ASX-listed Colorpak's annual sales to about A$250 million from $80 million. Its shares surged 13% to a 3 ½ year high.

It will initially provide a smaller lift to earnings. Carter's folding carton assets generated just A$4 million of EBITDA, amounting to 2.4% of A$170 million in sales in calendar 2009.

By contrast, Colorpak gets A$15 million of EBITDA on $80 million of sales, amounting to gross margin of almost 19%. 

"I'm getting a premium on acquisition," Colorpak managing director Alex Commins told BusinessDesk.

"The income being produced by those assets is fairly low. It is a very low-margin regime." 

He declined to speculate on how Carter Holt got itself in a position of making such a low return on sales, saying only that the vendor "has decided these assets are surplus to requirements".

"We hope that one plus one will equal three," Commins said.

"We think it is a good deal - the market obviously agrees." 

Shares of Colorpak climbed A7 cents to 59 cents on the ASX and have gained 15% in the past three months.

Only one analyst is listed by Reuters as covering the stock and they have a ‘buy' rating. Colorpak isn't assuming any debt from Carter Holt and will borrow only about A$5 million to help finance the transaction.

The purchase requires approval from the Australian Competition & Consumer Commission and the company has submitted a detailed plan to the regulator. 

The transaction will be earnings accretive, based on cost synergies, Colorpak said. There is "considerable further potential" to squeeze down on costs and fatten margins. 

The deal will be funded out of existing cash and extended debt facilities and the company doesn't plan to raise any new equity capital.  

Under the terms of the agreement, Colorpak has entered a long-term agreement to be supplied with folding carton board by the Whakatane Mill of Reynolds Group, Hart's main global packaging vehicle, for a minimum of two years. In turn, Carter Holt has agreed not to compete with Colorpak for four years. 

Hart is currently occupied in attempting the takeover by Reynolds of Pactiv, a US$6.5 billion deal.

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