In a commingling of disposable food packaging giants, Solo Cup Co. has agreed to buy rival Sweetheart Cup Co. Inc.
The companies together control a bulk of the market for disposable food and beverage products in both food-service and retail markets, supplying a variety of plastic cups, plates, bowls, trays and cutlery. Together, the companies have about 34 plants in North America - about two-thirds of them from Sweetheart - and recorded sales of about $2.1 billion in 2002, according to published reports.
Assembling those vast holdings into one coherent piece will be the first order of business for the newly enlarged Solo, said spokesman Drew Ferguson. The company already is putting together an integration team that will work on consolidating the holdings, he said Dec. 30.
``We're looking at the performance and profitability of the facilities for both companies,'' Ferguson said. ``Pretty much everything is on the table. We'll be putting out more information in the first quarter of 2004.''
Ferguson would not speculate on which facilities might be targeted for consolidation. The companies both offer broad-based North American sites, with Solo slightly more global with plants in England, Japan and Panama. Sweetheart's sales are larger than Solo's, according to analysts following the deal, but Solo claims to be the larger maker of disposable food-service items.
The deal, announced Dec. 22 for undisclosed terms, is expected to close by early March, subject to regulatory approval and financing, Ferguson said.
New York-based equity firm Vestar Capital Partners will make a $220 million investment in Solo to help complete the transaction, gaining a minority ownership stake in the company, said John Woodard, a managing director based in Denver. Vestar will add Solo to one of its current funds that is worth about $2.5 billion.
``It's a pretty exceptional opportunity,'' Woodard said. ``The degree to which these two complementary businesses can work together is very intriguing to us. It creates a leader in the industry.''
The integration of the businesses, and efficient management of the joined companies, is key to the transaction, Woodard said. Vestar, which also has a stake in Atlanta-based blow molder Consolidated Container Co., will leave that tough integration work to the Solo management team, he said.
``We'll make sure the capital structure is right to support the operational talents,'' he said. ``There is absolutely plenty to do as the first step.''
Executives with both companies were unavailable for comment, but glowed about the sale in news releases. Sweetheart Chairman and Chief Executive Officer Dennis Mehiel said customers will be better served by a combined company. And Solo Chief Operating Officer Ronald Whaley called the merger of the two longtime competitors a landmark achievement.
``It's an important event in the history of our two companies, as well as in the ever-changing disposable food-service products industry,'' Whaley said. ``Joining forces with Sweetheart will result in a winning outcome for all of our customers.''
Sweetheart has faced some internal issues that fueled the sale. Based in Owings Mills, Md., the firm recorded sales of $1.28 billion for fiscal 2002. The company has been hampered by declining sales and profitability, recording a loss of $3.15 million last fiscal year. Sweetheart is owned by New York-based SF Holdings Inc.
Mehiel owns 62.3 percent of the outstanding shares of common stock of SF Holdings, according to a public filing.
Sweetheart has attempted to restructure its debt and said earlier this year it would consider selling some assets or the entire business to pay off subordinated notes and bank loans. It cited a reduction in business and leisure travel - affecting its hotel and restaurant sales - and inefficiencies in its manufacturing base. In June 2002, Sweetheart launched a workforce reduction program that led to the loss of about 200 positions.
The company serves an array of quick-service stores, including McDonald's Corp. and Burger King Corp., large supermarket chains and convenience stores.
The industry softness that pierced Sweetheart after the Sept. 11 terrorist attacks is still an issue for a conjoined Solo and Sweetheart, said credit analyst Cynthia Werneth of New York-based ratings service Standard & Poor's. However, Sweetheart has made some headway on its recent restructuring, Werneth said Dec. 30.
Sweetheart had received a fairly low credit rating, but was bumped slightly upward a few days before the acquisition was announced, Werneth said. The company had faced a potential maturity of its bank loans, an issue that seemingly will go away with Solo's ownership, she said.
``Management at Sweetheart had been financially aggressive and had run with fairly high leverage,'' Werneth said Dec. 30. ``But they improved operating efficiencies and completed a major operational restructuring earlier [in 2003]. It was an ambitious move that seems to have gone well and is starting to show benefits.''
But the food-service business still is plagued by low profit margins, a high degree of competition and a consolidating customer base, Werneth said. The sale could help Solo effect savings that could lower costs but some risks are attached to buying such a similar industry power, Werneth said.
``[The integration] may take longer than people think,'' she said.
Solo, based in Highland Park, Ill., is more private than Sweetheart and does not reveal financial figures. The company recorded sales last year of about $900 million, according to industry estimates. Solo claims to be the top producer in North America of plastic cups, plates and bowls and has separate consumer products and institutional sales divisions.
The purchase also boosts the thermoforming presence for both firms, according to Plastics News' figures. Combined, the companies would have recorded about $715 million in thermoforming sales last year, placing them second only to Lake Forest, Ill.-based Pactiv Corp. Both firms also injection mold a variety of products.
The largest rival remaining in the North American disposable food-service market is Mason, Mich.-based Dart Container Corp. Dart recorded an estimated $240 million in thermoforming sales in 2002, according to Plastics News' ranking.
The sale also includes two separate companies owned by SF Holdings that make paper disposable products, Hoffmaster Tissues and Fonda Brands Inc.