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Pact Group shares surge, is it a better bet than Amcor Limited?

If you take the resources shares out of the equation, the best performing share on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) so far today has been Pact Group Holdings Ltd (ASX: PGH) with a gain of over 4%.

The reason Pact Group has been outperforming its packaging industry peers Amcor Limited (ASX: AMC), Orora Ltd (ASX: ORA), and Pro-Pac Packaging Limited (ASX: PPG) today is down to a positive announcement released to the market this morning.

That announcement revealed that Pact Group has entered into an agreement to acquire specialty contract manufacturer Australian Pharmaceutical Manufacturers for $90 million. The acquisition price equates to a multiple of 6.5x EBITDA and is expected to close on September 16, subject to customary conditions.

Considering that Pact Group, Amcor, and Orora all trade at over 11x EBITDA, the acquisition of one of the largest providers of manufacturing and packaging services for nutraceuticals in Australia for just 6.5x EBITDA certainly looks to be great value in my view.

The Australian Pharmaceutical Manufacturers business does appear to be a strong one. According to management it has established, long-term relationships with leading participants in the health and wellness sector. This will no doubt be a boost to the company’s strategy of expanding its presence in specialised contract manufacturing and complements last year’s successful acquisition of contract manufacturer Jalco.

Management revealed that the acquisition will be funded by $75 million of bank debt and a $15 million share issue. It is expected to be earnings accretive in year one and meet the company’s 20% return on investment target by year three.

Overall I believe this acquisition will prove to an astute one and thus I’m not surprised to see the share price rally higher as a result of it. I believe Pact Group could be a great investment, especially with its shares changing hands at 18x full year earnings compared to 20x earnings for Amcor and Orora.

But before making an investment in Pact Group I would highly recommend taking a look to see if you own either of these three wealth destroying ASX shares. Now might be a great time to swap them out of your portfolio before they potentially damage it.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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