Sonoco buys Tegrant for $550 million

By: Dan Hockensmith

October 10, 2011

HARTSVILLE, S.C. (Oct. 10, 10:25 a.m. ET) — Sonoco Products Co. has added to the plastics side of its packaging business, announcing Oct. 10 that it intends to acquire Tegrant Corp. from New York-based private equity firm Metalmark Capital LLC for $550 million. The deal is expected to close in November.

Sonoco Chairman and CEO Harris DeLoach Jr. said during an Oct. 10 conference call to discuss the deal that the acquisition of Tegrant is the largest in Hartsville, S.C.-based Sonoco’s history.

In Tegrant, Sonoco found a company with good leadership, similar values and culture, and a commitment to its customers, he said.

“This [acquisition] does raise our debt-to-capital ratio and our leverage ratio higher than we traditionally have it. Our main focus over the next 18 months will be on getting this thing integrated and paying down some debt,” DeLoach said.

The addition of Tegrant will give Sonoco access to growth markets, particularly medical and retail club stores; will help Sonoco grow its consumer and industrial businesses; and allows for a greater diversity of packaging offerings in plastic, foam and paper, he said.

Tegrant is projected to generate 2011 sales of approximately $440 million. The combined Sonoco-Tegrant businesses are projected to generate sales of approximately $5 billion in 2012.

Sonoco’s combined protective packaging businesses will represent approximately 11 percent of Sonoco's projected 2012 sales, DeLoach said. Tegrant brings to Sonoco immediate access to growing markets such as medical devices, pharmaceuticals, and health and beauty, while providing Sonoco expanded access to a variety of industrial components and automotive markets, he added.

DeLoach said that Ron Leach, Tegrant’s president and chief executive officer, has agreed to stay with Sonoco and continue leading Tegrant’s businesses.

John Colyer, vice president of Sonoco’s global industrial converting division, will be given expanded responsibility for the company's global protective packaging, tubes and cores, and wire and cable reels businesses.

Jack Sanders, Sonoco’s president and chief operating officer, said during the conference call that Tegrant took steps in recent years to right-size its operations, and that it targeted end markets with 3-5 percent projected annual growth.

“The combination of Sonoco and Tegrant creates a powerful growth engine that is either number one or number two in the targeted growth markets,” he said.

According to Securities and Exchange Commission filings, consumer packaging makes up about 40 percent of Sonoco’s business, with industrial packaging comprising the majority 60 percent.

The Tegrant acquisition is expected to be accretive to Sonoco’s 2012 pro forma earnings by approximately 10 cents per diluted share, including estimated adjustments for purchase accounting and approximately $11 million of expected synergies.

Sanders said both internal teams and outside consultants are working to integrate Tegrant’s business into Sonoco.

The price of the acquisition, adjusted for expected tax benefits, is approximately 6.8 times Tegrant's estimated pro forma 2011 earnings before interest, taxes, debt and amortization of $74 million.

The transaction is expected to be financed from existing cash and debt with an estimated credit leverage ratio of 2.2x EBITDA at closing.

Sonoco intends to reduce the incremental debt using free cash flow over several years. Chief Financial Officer Barry Saunders said in the conference call that Sonoco met with ratings agencies Standard & Poor’s and Moody’s; while the company has not received feedback, it expects the Tegrant deal to have little impact on its credit.

Ghansham Panjabi, a senior analyst with Robert W. Baird & Co. Inc. in Milwaukee, said in an Oct. 10 email that the deal makes strategic sense as it adds considerable critical mass to Sonoco's existing protective packaging business.

“Also, it gives them some differentiated technologies [temperature sensitive products] that they should be able to leverage across their customer base.

“[The acquisition] fits with our view that if core growth starts to slow, given macro uncertainty, then companies with strong balance sheets will very likely deploy cash towards mergers and acquisitions,” Panjabi said.

In a note to investors, Baird advised that the deal should result in a modest positive for Sonoco shares.

Tegrant is headquartered in DeKalb, Ill., and operates three strategic business units: Protexic Brands, a manufacturer of molded expanded foam for custom packaging that operates 15 plants and employs 1,000; ThermoSafe Brands, which provides temperature-sensitive pharmaceuticals and food packaging which operates eight plants and employs 500; and Alloyd Brands, a leading manufacturer and designer of high-visibility packaging, printed products and blister packaging machines, which employs 800 at eight plants.

All together, Tegrant operates more than 30 manufacturing, design and testing facilities in the United States, Mexico and Ireland and employs more than 2,000. Four of those plants were added after Protexic purchased Indianapolis-based Createc Corp., a manufacturer of highly-engineered, custom molded foam products, in January.

Macquarie Capital served as financial advisor to Sonoco. Tegrant was represented by Sagent Advisors.

Sonoco officials recently set a sales goal of $6 billion by 2014; the Tegrant deal brings that closer to fruition, DeLoach said.

Sonoco operates 315 locations in 34 countries, with about 17,000 employees. It had sales in 2010 of $4.1 billion.

For the second quarter of 2011, Sonoco reported profit of $53.4 million on sales of $1.1 billion, compared to profit of $59 million on sales of $1 billion for the year-ago period.

Sonoco will release its third quarter results Oct. 18.