Making decisions reminiscent of another era, three plastics processors have decided to cast their fortunes - and their stocks - on the public market.
On May 23, Philadelphia-based Crown Cork & Seal Co. Inc. announced plans for an initial public offering to spin off its Constar International Inc. PET bottle unit.
A day later, York, Pa.-based container maker Graham Packaging Co. LP raised the IPO flag. Graham had attempted to go public in 2000 but nixed the idea when the stock market started to slide.
``Based on the advice of our investment bank, the market for our type of company has improved from two years ago,'' Graham Chief Financial Officer John Hamilton said in a May 31 telephone interview. ``The whole dot-com implosion had an impact on the entire market. But things have settled down a little more.''
The IPOs of those container competitors are slightly behind that of construction-toy maker Mega Bloks Inc. of Montreal. The injection molder closed its IPO on May 9 after raising C$105 million (US$68.4 million) by selling shares on the Toronto Stock Exchange.
Even with the flurry of IPO activity, taking a company public can be an expensive risk for processors in today's fidgety market, according to several financial consultants covering the plastics industry. ``Sometimes, the only ones making money on the deal are the lawyers,'' said one analyst.
Mega Bloks was the first company in Canada to go public this year, said Chief Financial Officer Alain Tanguay. Some 65 investors bought stock in Mega Bloks, a rival in building-block toys to Lego Co.
``Even though the market is a little tougher these days, there's always going to be a place for a good company with a successful growth story,'' Tanguay said. ``It opened a few more [financial] alternatives for us.''
Maybe Mega Bloks' success will usher in change. IPO filings hit a drought last year after a boom in the late 1990s. In fact, in the months of August and September, only four companies filed for public offerings, according to Internet research firm IPO.com. Conglomerate Tyco International Ltd. canceled its plans in April to spin off several divisions after market resistance.
Since Graham pulled its IPO in October 2000, very few plastics companies have made another attempt, said Tom Blaige, managing director of Chicago-based Lincoln Partners LLP. An IPO is no guarantee of success for midsize processors such as Constar and Graham, Blaige said.
``Smaller-cap public companies have really not been perceived to have strong growth potential and the resources to fuel technological advances,'' he said. ``And historically, plastics companies have had a difficult time in public markets.''
But current market valuations for publicly held packaging companies work in favor of Constar and Graham, said Ken Brooks, a Montreal-based vice president with Ernst & Young who follows the plastics and packaging industries. Publicly held packaging firms are being traded at lofty prices that, on average, are within 5 percent of their 52-week highs, Brooks said. All that bodes well for attracting investors to an IPO.
``Their timing could not be better than right now,'' he said. ``There seems to be an appetite in the market for packaging stocks.''
But that appetite could be doused unless institutional investors are sold on the company.
``In this economy, it's very hard for any company to pull off an IPO,'' said Brian Tartell, president of PennTar Consulting Inc. of Port Washington, N.Y. ``Whoever underwrites the stock has to give it a good promotion, and they must have a sexy story to tell. But you usually want to do that when the market is ascending.''
The story for Graham and Constar is more practical than sexy. Graham said it wants to use the proceeds of its offering - about $250 million - to pay down $180 million in debt and improve financial flexibility.
The company recorded $923.1 million of sales in 2001. But it also has actual total debt of $1.078 billion, as of March 31.
About 85 percent of Graham is owned by affiliates of private equity firm Blackstone Group, Graham executives and an institutional investor; the remainder is owned by members of the Graham family. The company will change its name to Graham Packaging Co. Inc. after the IPO.
Blackstone's February 1998 leveraged buyout of Graham fueled much of its debt, Hamilton said, Meanwhile, growth has continued for Graham as more glass and corrugated-paper containers have converted to plastic, he said.
``I feel that we bring something unique to the market,'' he said. ``We're solely focused on custom, value-added containers.''
Blackstone and Graham's other investors expect to continue to own a majority of the company after the IPO, Hamilton said.
Crown Cork wants to raise as much as $150 million in a public offering (with another $350 million raised from the sale of senior subordinated notes and a term loan) to pay down leverage and raise profit margins, said Timothy Donahue, Crown Cork senior vice president of finance: ``We're in a pretty exciting business with PET containers,'' he said. ``It's a growing business and one undergoing extreme volume growth in the number of product lines.''
In general, though, a level of skepticism remains, said Charles Johnson, managing director of Matrix Capital Markets Group of Richmond, Va. Plastics companies still must prove to investors that growth will continue.
On the flip side, companies in the food and beverage industry also offer steady growth, a possible safe comfort zone in a still-mercurial market, he said.
``I was a little surprised those companies took the IPO route,'' Johnson said. ``But while those companies don't typically achieve a high level of growth, they also have a more limited downside.''
Continuing its growth pace spurred the IPO of injection molder Mega Bloks. Like Graham, the toy company is majority owned by New York-based Blackstone Group. Even after the IPO, Blackstone still owns 55 percent of Mega Bloks, Tanguay said.
Mega Bloks just completed a period of expansion in 2001, moving to an 820,000-square-foot facility in Montreal that more than doubled manufacturing space.
The firm is coming off a year in which sales rose to US$150 million, up from US$113 million in 2000, and profits were in the black. But Mega Block wanted to reduce its debt, much of it coming from Blackstone's purchase of the molder in 1996, Tanguay said.
``Because of our debt level, we couldn't cultivate the acquisition prospects or internal opportunities at the level we would have liked,'' Tanguay said.
The company's stock price already has risen from C$14.50 (US$9.45) a share on May 9, when the IPO was completed, to C$18.50 (US$12) a share on May 30.
Executives at Constar and Graham are betting on the same success. Whether they achieve it will depend a lot on how the stock market shapes up by the third quarter, when both IPOs are scheduled to take place.
``What could end up happening in the fall is one of two things,'' Tartell said. ``Either they'll have to pull back their IPO because the market is stagnant, or they'll be considered brilliant.