Owens Illinois Inc. may sell or spin off its plastics blow molding business, one of the largest in North America.
The Toledo, Ohio-based company has hired advisers to conduct a strategic review of some of its blow molded plastics operations. The company is considering all potential options and cannot speculate on a time frame to reach a conclusion, said spokeswoman Sara Theis.
O-I is among the largest makers of both PET and high density polyethylene bottles in North America, serving a diverse range of food, beverage and consumer-products customers. The entire plastics business recorded sales of nearly $1.8 billion last year, but that figure also included injection molded closures that are not to be part of the review, according to several analysts following the company.
The value of the unit under review was estimated at close to $1.3 billion, according to one analyst who did not want his name used, and includes 30 plants in North America, three in South America and four in Europe.
Only one other company, Amcor PET Packaging of Manchester, Mich., rivals O-I's blow molding operations in North America, according to Plastics News rankings. That would make a sale both huge and difficult to swallow in one piece, said equity analyst Ghansham Panjabi of New York-based Lehman Bros.
``They haven't been very specific on their intentions,'' Panjabi said Dec. 12. ``Maybe they're just trying to test the waters to see if there are any serious bidders. But the fact is that they are trying to pay down about $5.5 million in debt, and asbestos liability is chewing up a lot of cash.''
The rise in debt, and the absence of free cash flow, have put O-I in the position where it is forced to look at alternatives to raise funds, said several analysts.
Another industry executive close to the situation said O-I may spin off the plastics business as a separate entity if it does not find a buyer. The publicly held company would gain more value in a sale but could reap the cash needed to reduce debt through a spinoff.
A goal of a sale or spinoff would be to reduce asbestos liability. In the first three quarters of 2003, O-I paid $157.2 million in asbestos-related cash payments. About 31,000 asbestos-related claims still are pending against the company.
There is no assurance that a spinoff would absolve a new plastics company of asbestos-related liability. But O-I needs to act because asbestos has been a drag on operating performance, said Liley Mehta, packaging analyst with credit research firm Standard & Poor's in New York.
The plastics business has been the high-growth side of O-I, compared to the more mature glass business where O-I has a dominant market share, Mehta said. Last year, O-I recorded $5.64 billion in overall sales, close to one-third from plastics.
But low profit margins in plastics have affected liquidity and could have led to the review, she said.
``This year and last year, they've faced severe pricing pressures and increased competition,'' Mehta said.
The company already has been shopping for buyers, according to several sources, but has not generated serious interest.
O-I has stepped up its plastics presence since 1988, when it purchased Brockway Inc. and then again in 1998 when it bought Continental PET Technologies Inc.
The company said Oct. 21 that it would launch a capacity utilization review of both its worldwide plastics and glass businesses. Those include possible capacity curtailments and sales of non-core assets. In that spirit, O-I recently sold its trigger-sprayer and finger-pump closures business to ContinentalAFA Dispensing Co. of St. Peters, Mo.
O-I also is undergoing a management change that could have affected its decision. On Dec. 5, O-I said that Terry Wilkison and Thomas Young would share the position of interim co-chief executive officers when CEO Joseph Lemieux retires at the end of 2003. Lemieux will remain board chairman.
Wilkison currently is executive vice president and general manager of the plastics group.
The review still has a long way to go before a decision is reached, Mehta said.
``There's a whole range of possibilities they can consider,'' she said. ``It's premature to consider to what extent they may go. They haven't given any public indication whatsoever.''
O-I's stock price rose 63 cents on the morning of Dec. 12, trading at $11.71, on news of the review.