Nypro: Sale to Jabil will allow growth

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CLINTON, MASS. -- Jabil Circuit Inc. will buy Nypro Inc. for $665 million -- a major strategic acquisition that gives the $17 billion contract manufacturer a new market of packaging and beefs up its molding for medical disposable goods and consumer electronics.

Global consolidation in key industries helped spark the deal, officials said.

Nypro directors approved the deal Feb. 3, a Sunday. Then in slam-bang fashion, Jabil, which is publicly traded on the New York Stock Exchange, issued an announcement of the deal at the start of business Feb. 4, followed by a conference call to analysts later that same morning.

Now attention turns to about 2,000 employee owners of Nypro, an iconic plastics manufacturer based in Clinton, Mass.

Jabil and Nypro executives will prepare a detailed proxy report and send it to about 2,100 employees — 1,900 members of an Employee Stock Ownership Plan in the U.S. and Puerto Rico, plus another 200 key international employees outside of the ESOP.

"We think that maybe the vote will take place at the end of March," said Nypro President and CEO Ted Lapres. Executives will meet with the employee-owners to explain the financial material, he said.

The deal is subject to a vote by participants in the ESOP, and it must pass antitrust review in the U.S. and China, Nypro's two largest regions.

Jabil, based in St. Petersburg, Fla., is buying 100 percent of Nypro, including Nypro's stakes in NyproMold Inc., the mold-making operation, and joint ventures such as Nypro Tool Manufacturing Group.

Timothy Main, Jabil's chairman and CEO, said Nypro's tooling expertise is important, especially in high-cavitation tools for packaging — a new area for Jabil. "One of the great things in packaging is a phenomenal tooling capability, where you are talking tools that are seven-figure-expense tools, so [there's] a big investment in the upfront ability to get that product to market," he told analysts. Main called Nypro a "master" of mold making.

The deal is expected to close in Jabil's fiscal third quarter, which ends in May.

Lapres said Nypro informed its 12,000 employees around the world about the deal immediately after Jabil issued the announcement. Each location held a meeting.

For Nypro, the new ownership will greatly boost its size to compete in consolidating global markets. The ESOP structure has hampered Nypro's ability to get financing for long-term growth, Lapres said in the conference call.

"We do have a very unique company culture and a very proud, long tradition of employee ownership, and our chairman is a legend in the plastics industry," Lapres told financial analysts.

"But it became clear to myself, our management team and our board over the last couple of years that the competitive landscape was changing and that size mattered in this industry, and that our customers were demanding more ... and paradoxically, the success of our employee ownership structure put us in a position where we didn't have the full funding and resources to fund all the great growth opportunities we have in these markets."

Nypro has been employee-owned since 1998, when its long-time president, Gordon Lankton, turned the company over to the employee group. Selling to an ESOP offers tax incentives, and maintains stability in the ownership change. Workers have a bottom-line incentive to make the company succeed.

But an ESOP can make it more difficult to borrow money, said Jeff Mengel, a partner with Plante & Moran PLLC who specializes in the plastics sector. An ESOP is similar to a public company because it has many owners, Mengel said, but it's different because a lender cannot take stock as collateral. And of course, ESOPs are different than a typical privately held plastics processor, where the owner could give a personal guarantee in collateral, like a house.

"So when it comes to them accessing the market — getting mezzanine financing or some other heavy leverage, it's harder for the credit markets to lend to an ESOP-owned company," Mengel said.

Lankton, who now is Nypro's chairman, had been the ESOP's trustee. But Lapres said that to handle the sale to Jabil, Nypro hired State Street Bank in Boston as an independent trustee to represent the interests of employee shareholders.

Rich history

Nypro is one of the world's largest custom injection molders, with $1.2 billion in sales from molding, tooling, product design and contract manufacturing. Nypro runs plants in 10 countries.

The plastics company is tiny compared to Jabil, which employs 141,000 and is a leading maker of mobile phones and other electronic products. But in the Feb. 4 conference call, Jabil executives heaped praise on Nypro and called it a major acquisition.

"It gives us immediate credibility in key markets" of packaging and single-use medical products for drug delivery and diagnostics, Main said.

Main said Nypro's sales breakdown is 45 percent health care, 23 percent packaging and 32 percent consumer electronics. "Without a doubt, this accelerates our strategic plan in health care by several years [and] will position Jabil as the No. 1 health-care provider, with unmatched capabilities [and] with a strong foothold in key consumable disposables markets such as drug delivery and diagnostics," he said. He added that that area is the fastest-growing part of the medical-device market.

Health care and packaging fit into Jabil's appropriately named Diversified Manufacturing Services business, which has become its largest of three segments.

Answering an analyst's question about profit margins, Main said Jabil "has struggled in the consumer electronics area" in the last couple of years.

Companywide, Jabil has generated a 2.3 percent net profit margin in 2011 and 2012. The net margin was only about 1 percent in 2008 and 2010, sandwiching a money-losing 2009 in the recession.

Jabil will continue the Nypro brand name. Lapres said he plans to stay with the company.

Courtney Ryan, Jabil's senior vice president of global business units, helped lead the transaction. He said Jabil provides electronics hardware to major medical customers, and those customers want to deal with full-service suppliers. "It creates a really, really unique market space for us," Ryan said.

Nypro runs about 1,500 injection molding presses around the world, spokesman Al Cotton said. About one-third of them are in North America. All of Nypro's U.S. factories are profitable, according to Mark Mondello, Jabil's chief operating officer.

The two companies each have sizable operations in China. Jabil also is a large injection molder. As a contract manufacturer, Jabil uses sprawling, highly automated plants with in-line assembly to make finished electronic products for customers like its three largest: Apple Inc., Cisco Systems Inc. and Research in Motion Ltd.

Jabil competes against other big contract manufacturers such as Flextronics International Ltd., Celestica Inc. and Hon-Hai Precision Industry Co. Ltd.

Nypro also does contract manufacturing, but on a much smaller scale.

In 2006, Jabil made a major expansion into plastic molding by purchasing Taiwan Green Point Enterprises Co. Ltd., a big Asian electronics molder of cellphone handsets and other electronic products. Executives at Jabil Green Point told Plastics News in a 2010 interview at its Taiwan headquarters that it had 775 injection molding machines and 23,000 employees, mostly in mainland China.

Jabil also invested $10 million in a medical injection molding plant in Shenzhen, China, in 2011, part of what the company said was a push into health-care manufacturing in the country.

Nypro, for its part, has plants in Hong Kong, Suzhou, Shenzhen and Tianjin, China, either on its own or as part of its Hong Kong-based Nypro Tool joint venture, according to its website.

Ryan said Nypro and Green Point have similar capabilities. "What Nypro has, however — that is a big, big, big deal in the markets that we are most interested in — is a 40-year history," Ryan said in the conference call. "There is a credibility that takes years and years to build. Nypro is considered a very safe pair of hands, a trusted partner to health-care companies. And frankly, ex-Nypro, we are still earning our strides in that regard."

Lapres and Ryan are traveling to visit customers and some Nypro factories.

Lapres said the new ownership will help Nypro grow. "We have very similar cultures and shared values. The complementary capabilities, we are excited about it," Lapres said on the call. "It's a great strategic fit from our side, and we just think it's going to be spectacular for our employees and for our customers."

Founded as Nylon Products Corp. in 1955, Nypro grew steadily to become one of the marquee U.S. custom injection molders. Gordon Lankton, who bought into the company in 1962, led Nypro through a series of moves that included a massive renovation of an old carpet mill into a headquarters in Clinton.

Under Lankton, Nypro expanded internationally, often using joint ventures with local molders.

Lankton could not be reached for comment for this article. In a news release, he endorsed the deal: "I have always believed in growing our business in order to create meaningful opportunities for our employees. Our partnership with Jabil does just that, and I am confident they are an ideal partner for Nypro."

Lankton is a member of the Plastics Hall of Fame and the Manufacturing Hall of Fame. Plastics News named Nypro its Processor of the Year in 1997.

Last year Nypro ranked No. 7 in Plastics News' survey of North American injection molders, with $644 million in relevant sales, and $1.2 billion in total corporate sales.

Origin of the deal

In an interview with Plastics News, Lapres outlined the history of the deal. The two companies already knew each other. Nypro has molded parts for Jabil. Sometimes they competed against each other.

This also is not the first time Nypro and Jabil have linked up on an acquisition. However the last time, in 2001, the buyer was Nypro.

In that deal, Nypro bought two injection molding plants in China from Jabil, including a plant in Danshui and the molding portion of an operation in Panyu. The deal included 80 injection presses with clamping forces up to 250 tons. The operations boosted Nypro's already-considerable stake in China. At the time it had molding and assembly plants in Shenzhen and Tianjin and a mold-making plant in Hong Kong.

Nypro continued to supply Jabil from the purchased plants.

Lapres said officials of the two companies have been discussing a possible deal for several months. Jabil made the first move. "They approached us initially, but the timing kind of coincided with a strategic options review that our board was already undertaking," he said.

Nypro used Brown Brothers Harriman & Co. in New York, which had helped set up the ESOP, as an outside adviser to explore options. That led to the talks with Jabil.

Lapres said that after Jabil executives gave an idea of the price, Nypro held limited discussions with other potentially interested parties, in what he called a "market-check process." The company did not formally seek competing bids.

Did Nypro get interest from private equity? Lapres said, "Our board considered a number of options."

He added: "We felt very strongly that a strategic option was very desirable for us. It just gives more compelling solutions to customers to help us grow, and that was a very strong consideration for us."