Foam cup and container maker Radnor Holdings Corp. asserted itself in the food-service market last week with two sudden moves:
* First, it entered an agreement Nov. 13 to buy drink-cup competitor Polar Plastics Inc., a thermoformer of disposable food-service items made of polypropylene. Radnor paid $28.7 million - only $6.8 million of that in cash and the rest in notes and the assumption of contractual liabilities. The sale is expected to close in several weeks.
* To help pay for that acquisition and boil down debt, the privately held, Radnor, Pa.-based holding firm also registered the same day to launch an initial public offering that is expected to raise about $54.8 million. The company hopes to sell almost 4.29 million shares of common stock.
The Polar deal shifts Radnor into thermoforming, an area that until now has been a small sidelight to its existing expanded polystyrene foam molding business.
The IPO decision bucks market trends at a time when many publicly held companies are considering going private due to a less-than-enthusiastic Wall Street, said Russell Warren, president of Cleveland-based investment banking firm TransAction Group Inc.
However, the number of middle-market deals, in the packaging sector and elsewhere, is gaining ground, Warren said. Others could greet the acquisition news as a good strategic play that could help both companies, he said.
"There are a lot of pressures on small business," Warren said Nov. 14. "You've got to have critical mass, and you've got to have the resources to compete effectively in a world market. Shareholder needs have to be considered to get the right solution."
Neither Radnor nor Polar commented on the deal. But others saw the move to mesh two niche players in plastic food service as a logical end game.
However, the IPO brings questions. Radnor, the owner of EPS cup maker Wincup Holdings Inc. of Phoenix, is burdened with $135 million in senior notes, due in stages by 2010, according to its registration filing.
"The IPO is a crapshoot," said Timothy Burns, president of Solon, Ohio-based equity firm Cranial Capital LLC. "But the food-service area is still viewed as a growth segment, and it's been a hot area. It could help stabilize their balance sheet and reduce debt if [investors] believe they can buy the stock at a good price."
Radnor expects to sell the stock at $12-$16 a share, with a reasonable expectation of opening at $14 a share, according to the filing. No IPO date has been set.
Even after the filing, about 55 percent of the company still will be owned by Radnor President and Chief Executive Officer Michael Kennedy and a trust established for his children, according to the statement.
Of the proceeds, about $32.8 million will be parsed for the company's revolving credit facility and another $22 million will cover term loans and mortgages, according to the filing.
And if the company underwriters - a high-powered team of bankers from Lehman Bros., Bear Stearns & Co. Inc. and Janney Montgomery Scott LLC - exercises its options in full, the company could gain as much as $63.2 million, the filing stated.
The Polar deal could have as much impact on its operating future. The company makes a spectrum of cups, stemware, plates, bowls, containers and cutlery at two facilities in North Carolina. The 30-year-old company has only one major competitor, Berry Plastics Corp., in thermoformed PP drink cups, according to the filing.
The fact that Berry views thermoformed cups as a major growth area could have fueled the industry's desire for Polar, Burns said. The lightweight, cold cups are lower in cost than traditional injection molded counterparts because of tooling.
Polar does both thermoforming and injection molding. The Mooresville, N.C.-based company has nine thermoforming machines, 37 injection presses and 10 raw-material storage silos that hold PP and PS, according to the filing. Radnor also will assume the lease for Polar's 342,000-square-foot Mooresville facility.
The acquisition will help Radnor move to a larger role in the disposable kitchenware market. The company already makes more than 13 billion foam cups, bowls and containers annually at 10 U.S. facilities and one in Poland. The company also makes its own EPS beads through its StyroChem International Inc. unit.
Combining Polar with its existing business would have generated $6.8 million in cost savings during its last fiscal year, which ended March 27, the filing stated. Those savings come from raw material purchasing, personnel reductions and plant closures. The company has not said if any plant shutdowns or layoffs are planned.
Polar was 23rd on Plastics News' ranking of top thermoformers in 2002, with $52 million in relevant sales. The company, founded in Montreal in 1972, recorded $90 million in overall sales last year, according to the ranking.
Wincup slightly trailed Polar in the same ranking, with $36.5 million in thermoforming sales and overall sales of $381.7 million last year.
During a Nov. 10 conference call to announce third-quarter results, Kennedy said his goals were to reduce leverage and enhance the company's cash flow. He did not specifically mention the IPO as a means to do that.
Even without the Polar acquisition, the company had significant new business coming next year, Kennedy said.
"We'll focus on the introduction of new products and on existing products," Kennedy said. With the Polar acquisition agreed to three days later, the first part of that statement is about to come true.