Countering speculation that it was shopping its Constar International Inc. PET bottle unit, Crown Cork & Seal Co. Inc. surprised the packaging industry May 23 by saying it will spin off the unit while keeping an ownership percentage.
``We believe in the upside of the business long-term and want to participate in that,'' said Timothy Donahue, Crown Cork senior vice president of finance. ``We can do that in an [initial public offering] situation. Doing that with a private sale would be a little more complicated.''
The debt-strapped Philadelphia company will sell Constar shares in an IPO expected to begin in the third quarter, depending on Securities and Exchange Commission inquiries.
Constar is one of the world's largest makers of PET containers and preforms. It recorded about $740 million in sales last year at 17 U.S. and European plants.
Crown Cork, a company more than a century old, hopes to raise as much as $500 million from the IPO. Sources familiar with the offer said Crown Cork plans to retain a significant share of Constar, but not a majority interest.
The IPO is being done for pragmatic reasons, Donahue said. The company is in the midst of a long-term restructuring, divesting some assets to pay down leverage and raise profit margins.
Much of that burden comes from lawsuits alleging asbestos exposure from insulation operations that Crown Cork bought in 1963 and sold just 90 days later. During the past four years, the company has paid $594 million to fund pending and future asbestos claims, according to its 2001 annual report.
To manage its leverage, the metal-can maker has divested its plastic fragrance pump and pharmaceutical packaging businesses, raising $170 million. The company also closed seven plants in the United States and Europe.
The spinoff of Constar is another small step in Crown Cork's efforts to become more profitable, Donahue said. Crown Cork lost $54 million in the first quarter of 2002 on sales of almost $1.57 billion.
``If all things were equal at Crown Cork, Constar would not be a business we would look to sell,'' Donahue said. ``This is just one step to generate cash, but there are no home runs to be hit.''
Constar is the second-largest processor of PET resin in North America and the third-largest in Europe, according to figures from rival bottle maker Amcor Ltd. of Melbourne, Australia
For more than a year analysts have speculated that Crown Cork would sell Constar to a rival. Ball Corp. and Rexam plc were mentioned as interested buyers.
But Crown Cork never had any intention of selling Constar and did not enter into serious negotiations with any buyers, Donahue said. While some equity groups expressed interest, Crown Cork quashed those attempts because it did not want to sell the entire business, he said.
Several outside analysts greeted Crown Cork's decision as a strong move.
``It was brought about by two things: the continued focus on improving the balance sheet and capitalizing on improvements in the PET bottle market both for volume and price,'' said Eric Bosshard, equity analyst with Cleveland-based Midwest Research Inc. ``They have a good possibility of getting this transaction done successfully.''
The company's decision also could be greeted warmly by investors in a public market beginning to open up again, said Steven Graham, senior managing principal of Graham Partners Inc., a Wayne, Pa.-based equity firm that has interests in other plastics processing companies.
``Investors will respond well to a highly focused, pure play,'' Graham said. ``A prospective investor has to believe this company has the management infrastructure and technology to compete for the continuing growth in the PET area. It's a deft move on their part.''
But Tom Blaige, managing director of Lincoln Partners LLC in Chicago, said Crown Cork could have a hard time attracting investors to an IPO. While the market is improving, few firms are attempting IPOs this year, he said.
And the PET container industry still is suffering from low earnings multiples, making it tougher to generate investor interest.
``It's not a slam dunk,'' Blaige said. ``There are still challenges to doing an IPO. Valuation is really the issue.''
Crown Cork will keep some of its plastics operations once it splits off Constar. The company has PET bottle ventures in China, Brazil, Morocco and the United Arab Emirates that are not part of Constar, Donahue said.
The bottle maker also will keep its plastic and specialty closures operations, which include plastic lids, caps, trigger pumps and sprayers. That unit, one of the world's largest in closures, has about $700 million in sales.
