For Kerr Group Inc., the June 26 deal to buy the packaging business of spice leader McCormick & Co. Inc. instantly remakes the company from a smallish caps-and-closure supplier to a producer of complete packages more than double its previous size.
At Sparks, Md.-based McCormick, the sale rids the company of a viable but sometimes-nettlesome business segment that did not fit its core focus of making seasonings and salsas.
McCormick head Robert Lawless said as much in a June 27 conference call with investment analysts to discuss second-quarter sales. The packaging business had been the subject of workforce and cost reductions over the past two years.
``We recognized for a number of years that it was not strategic for McCormick,'' said Lawless, McCormick chairman, president and chief executive officer. ``Many of you viewed it the same way and encouraged us to take action. It was under scrutiny following the downturn in demand for tubes.
``The first step was getting it back on track.''
So, for both companies, the anticipated sale brings relative elation. Kerr, based in Lancaster, Pa., agreed to pay $142.5 million to buy the McCormick businesses. Those businesses, with annual sales of $170.6 million in fiscal 2002, include blow molder Setco Inc. and Tubed Products Inc., a maker of plastic squeeze tubes.
Kerr will pay $132.5 million in cash and another $10 million over five years, depending on the companies meeting performance goals. Kerr also signed a multi-year supply agreement to provide packaging to McCormick. The agreement is expected to close by the end of the third quarter.
Kerr gains four plants and about 1,400 employees in the sale. The facilities are in Anaheim and Oxnard, Calif.; Easthampton, Mass.; and Cranbury, N.J. They join five existing Kerr plants.
Kerr, a 95-year-old company, also will gain bulk from the deal. It continues a pattern of change at the company that started in 1997, when San Francisco-based investment firm Fremont Partners bought Kerr and took it private.
The firm, formerly known for its metal and glass jam jars, had left that business and built a profitable plastics caps and closures operation.
The company continued to make moves into plastic containers in the late 1990s, buying several small companies with the backing of its equity firm. Fremont, managing a $920 million fund, had considered selling Kerr in 2000 but instead decided to grow the company, said Thomas Blaige, chief executive officer of Chicago-based investment banking firm Thomas Blaige & Co. LLC.
The McCormick acquisition transforms Kerr into a larger player for both specialty closures and containers, Blaige said. It also catapults sales to more than double the estimated $140 million recorded by Kerr in 2000, he said.
That follows the lead set by other packaging producers, including Berry Plastics Corp. and Alcoa Inc., to marry injection molded closures with containers, Blaige said. The result, including the use of shrink sleeves and labels, is a more-complete packaging system for customers, he said.
``Everything is blurring and blending together,'' Blaige said. ``For Kerr, the purchase is an example of morphing from metals and glass to caps and closures to value-added plastic containers.''
Kerr officials were unavailable for comment. A news release from the firm said the deal will strengthen its position as a top specialty plastics packaging company and diversify its port- folio. The company did not announce plans to integrate the McCormick businesses with Kerr's plants.
But some changes could be afoot, said Richard Hofmann, president and chief executive officer of Kerr, in the release. ``The opportunities we have identified for efficiencies and growth as a result of this combination make it a compelling transaction,'' he said.
Setco and Tubed Products have been owned by McCormick for more than 20 years. According to McCormick information, only about 20 percent of the companies' sales were generated for McCormick's brands, with the rest being sold to outside customers.
The companies not only make containers and closures for McCormick's spices and seasonings, but also sell packages for other products, including vitamin bottles, pharmaceutical containers and personal-care products.
The packaging group suffered a downturn in sales in 2000, partly predicated by lower demand for vitamin and herbal products after media reports questioned label claims. Sales declined by more than $9 million, or about 5 percent of sales, from fiscal 2001-02.
The company has worked to reduce costs and increase the profitability of the packaging businesses, Lawless said in the conference call. That included an unspecified number of job cuts at the facilities, he said.
``By the end of 2002, the [packaging] businesses were gaining sales and opportunities with improved margins,'' he said. ``We were ready to pursue the sale of the businesses, and we successfully negotiated a wonderful agreement that we believe is in [our] best interest.''
Since Lawless became CEO of McCormick in 1997, the firm has moved in a more food-oriented direction. In June, the firm closed its recent $180 million acquisition of Zatarain's, a New Orleans-style maker of food and spices. The sale of the packaging operations will help fund the Zatarain's purchase, Lawless said. The company also owns a Mexico-based salsa maker and other food operations.
The moves by McCormick are typical in the food industry, where companies are exiting noncore operations, said Jerry Caruso, a partner at investment firm Goldsmith Agio Helms in Minneapolis.
``A lot of the food packaging companies are trying to get out of manufacturing,'' he said. ``They would rather outsource production of plastic products than make them themselves.''