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Pact Group valued at $1.7 billion – but should you buy it?

Packaging business Pact Group (ASX: PGH) is set to hit the ASX boards before Christmas, being valued at 13.4 times forecast earnings per share for 2014. The business is seeking to raise $648.8 million at an offer price of $3.80 per share. The float is reported to be heavily oversubscribed and is another nice IPO fee earner for Macquarie Group (ASX: MQG), acting in its capacity as co-manager of the offer.

Formally founded in 2002 by Raphael Germinder, the business supplies plastic and metal packaging for food, dairy and beverage containers. It’s client list being a who’s who of household brands across Australia. It currently also has operations in New Zealand, China, the Philippines and Thailand.

The prospectus outlines how in 2002 sales revenues were $223 million, compared to forecast revenues of more than $1.1 billion in financial-year 2014. The growth coming through a mix of 34 acquisitions in the past 11 years, organic expansion and operational improvements. The entrepreneurial chief executive now wants to expand his packaging empire further into Asia, with some of the offer proceeds earmarked for this task. Asian sales currently represent a very small part of the business, with a huge potential market to be looked at and developed.

The group says demand for plastic packaging in Australia and New Zealand, is likely to grow at a compounded annual growth rate of 4% between 2012 and 2018. As the business grows economies of scale should keep taking effect, lowering production costs and improving margins, but the group remains subject to price changes of the raw materials required to make the packaging.

The group’s main rival will be packaging-giant Amcor (ASX: AMC). It’s also a business that has also grown rapidly through acquisitive activity since listing way back in 1969. Amcor currently has a market capitalisation in excess of $13 billion.

Foolish takeaway

There’s no doubt Pact has delivered some impressive growth over the past decade, the question being is it capable of maintaining it? With a big track record and opportunities for further rapid growth, it’s certainly a business to keep an eye on.

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Motley Fool contributor Tom Richardson owns shares in Macquarie. 

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