Sonoco Products Co., a company that claims credit for converting supermarkets to plastic bags, has agreed to sell its high density polyethylene film business to a group that includes the former owner of Sonoco's bag operation.
Hartsville, S.C.-based Sonoco will sell the unit to Hilex Poly Co. LLC, a company owned by investment firm HPC Group of Cos. HPC is owned by Leon Farahnik, a longtime plastics company owner who had founded Hilex in 1979.
The operation will be run separately from another business owned by HPC, food-container thermoformer PWP Industries of Vernon, Calif.
The sale will take the Hilex business full circle, since Farahnik sold Hilex to Sonoco in 1989. Farahnik is re-entering the plastic-bag sector with financial backing from Atlanta-based DCH I Investment Holdings LLC, an affiliate of private equity firm Dewberry Cesinger Hodgson.
The Hilex name again will be used for the Sonoco business after disappearing for the past 14 years, Farahnik said in a Sept. 18 telephone interview from HPC's Los Angeles headquarters.
``The Hilex name was there, and we decided to use it for the purchase,'' Farahnik said.
``We consider Sonoco the leader in the industry for grocery-sack sales. Customers should be very happy that we are continuing the same business, and we will be very sensitive to our customers' needs.''
After buying Hilex, the company spent the ensuing years convincing major grocery chains to offer plastic bags, said Sonoco Vice President Allan Cecil. The firm started recycling programs and bagging systems in stores, he said.
``We were very aggressive in sales, showing grocery chains how they could significantly reduce their total bagging costs by using plastic instead of paper,'' Cecil said. ``We were able to offer a lower-cost option that consumers also preferred.''
That business grew in volume - and Sonoco became the market leader in North America for plastic grocery bags.
But the company's larger paper packaging business became more of a focus recently, as cost and profit pressures led the company to make some difficult moves - including the recent closure and sell-off of several plastics facilities in an ongoing quest to reduce costs by $60 million.
Sonoco's HDPE film operation, while a steady performer, became expendable, he added. The operation includes the blown film extrusion of polyethylene for grocery bags, retail bags, T-shirt roll bags, agricultural mulch film, quick-service restaurant bags and produce bags.
HPC will pay $123 million for the business, including $85 million in cash plus subordinated notes and preferred nonvoting membership interests.
The business recorded sales of about $89.5 million for the first six-months of 2003 and would have totaled sales of close to $200 million for the entire year, Cecil said.
To Sonoco, a company with $2.8 billion in 2002 sales, the business was a smaller addendum to its operation. Yet, it wanted to find a good home for it, Cecil said.
``Obviously, it's not illogical to have the person who used to own Hilex buy back the business,'' he said. ``He knows it well.''
The move leaves Sonoco with virtually no in-house film extrusion operations, although the company is a major converter and laminator of printed consumer film.
The company also makes a variety of rigid plastic packaging and injection molded parts for industrial applications.
The sale includes a plant in Hartsville, where the group is headquartered, and in Milesburg, Pa.; Mount Olive, N.C.; North Vernon, Ind.; and Victoria, Texas. About 800 employees are part of the business. The sale is to close in the fourth quarter.
HPC plans no immediate changes, Farahnik said.
Hilex signed a lease for as long as two years to maintain the Hartsville plant, located on Sonoco's campus, and a Sonoco-owned office in downtown Hartsville, Cecil said.
Farahnik said he hopes to build a larger plastics manufacturing company using the new Hilex as a base. The grocery business is not a small one in North America, with between 900 million and 1.2 billion pounds of resin used annually, he said.
Farahnik has a considerable plastics background: His father had owned plastics processors in his native Iran before moving the family to the United States. Farahnik, who was born in the United States, founded Hilex and helped start the grocery sack business here.
The operation makes coextruded and monolayer bags.
Hilex will benefit from relationships with the same customers as PWP, a maker of amorphous PET food containers, Farahnik said. HPC acquired an interest in PWP in September 2001.
The Hilex business faces competitive pressures, Farahnik acknowledged. Resin prices for PE have ridden a rollercoaster - Sonoco will not miss those ups and downs, Cecil said - and Asian competition has swiped a share of the U.S. bag market.
``The Chinese manufacturers have brought in a lot of low-cost bags, making it more difficult to compete,'' said film consultant Huston Keith of Keymark Associates Inc. of Marietta, Ga. ``Because of that, the grocery sack industry is not something that is real appealing to a lot of people. I imagine Sonoco was pretty happy to sell it.''
Competitive pressures are the nature of any manufacturing business, said Steve Cesinger, president of Dewberry Cesinger and a key investor in the Hilex deal. The quality of the Sonoco products and the technical resources that Farahnik brings can help the business become more successful, he said.
``I don't think you can take any competition for granted, but the most efficient producers can compete in that space,'' Cesinger said.
``It's a question of blocking and tackling to compete both domestically and internationally.''
The company, a well-known commercial and retail real-estate developer in the Atlanta area, wants to grow the business, possible through other acquisitions, Cesinger said.
The sale of Sonoco's film unit could spur more consolidation, said Charles Johnson, senior managing director of FTI Merger and Acquisition Advisors of Washington. The grocery-bag market is highly fragmented, with many smaller producers competing with Hilex, he said.
``I believe there'll be continuing consolidation in this segment,'' he said.
``Some companies won't survive the shakeout over the next couple of years. Companies have to get more scale out of operations to compete.''