AEP Industries Inc. is exiting the oriented polypropylene films business and selling some of the assets to OPP competitor Applied Extrusion Technologies Inc. for $13 million.
``The consolidation of the OPP films industry has finally begun,'' Thomas Williams, AET's chairman and chief executive officer, said in a news release.
AEP entered the OPP business in 1996, when it bought Borden Inc.'s plastics packaging business. The South Hackensack, N.J.-based operation ran three lines, producing about 40 million pounds of OPP film a year, or about 6 percent of the total North American market.
``This is a very tough, competitive environment in which we saw no near-term improvement,'' Brendan Barba, AEP chairman and chief executive officer, said in a telephone interview.
``We're a small niche player and that's part of the reason we made this decision,'' he added. ``We were no factor in the market. And we were ill-equipped to compete with new technology such as what AET has. For example, AET operates one line that has capacity of 50 million pounds, more than our three lines together. That's the reason we exited the business.''
AET is the world's second-largest producer of OPP film, controlling 27 percent of U.S. capacity, said Anthony Allott, AET chief financial officer.
``Additionally, due to industry wide overcapacity, we do not anticipate that this business will return to its traditional levels of profitability in the foreseeable future,'' Barba said in a news release. ``We believe that exiting this business will allow management to focus on enhancing its market leadership positions in businesses where we are the low-cost producer and where our value-added factor is indisputable.''
The deal, which is expected to close by April 15, will affect about 225 employees who work at AEP's North Andover, Mass., Proponite operation. Some have been offered positions at other AEP plants, and some will work with AET, Barba said.
AET has purchased the three film lines, technology and any contractual rights AEP may have had.
AEP has a couple of good product lines and patent rights that are valuable in the market, Allott explained. AET plans to relocate one line but will not have it up and running for about two years. The other two lines will never run OPP again, he said.
``We have four similar lines to what AEP has,'' Allott said. ``The parts are valuable to us.''
AEP estimates that over time, it will receive an additional $8 million resulting from winding down the business. As a result of exiting the business, AEP estimates it will incur a loss of $27 million.
``This will have a major impact on our operating expenses,'' Barba said. ``It will help the company by stopping operating losses.''
The price of OPP film is too low for small companies to invest in the business, Allott said.
``The North American OPP films industry is approaching its lowest utilization level in 10 years, as all seven of the new OPP production lines planned in North America have been placed in service and are now operational,'' Williams said. ``As a result of the low utilization level, OPP films have suffered unprecedented price deterioration.''
``I think we're at the bottom of that time, at the trough, and no new capacity is coming on,'' Allott said. ``This deal is a pretty important milestone.''
AEP ranked 11th in Plastics News' 1998 survey of North American film and sheet manufacturers, with $469.6 million in relevant sales. It would not break out OPP film sales. AEP reported total 1998 sales of $701.2 million.
AET, based in Peabody, Mass., operates three OPP plants and employs about 1,200. It ranked 22nd in Plastics News' 1998 survey, with sales of $262 million.