With its deal to acquire Sweetheart Cup Co., Solo Cup Co. is expanding its turf in a business plagued by slow growth, falling prices and shrinking profit margins.
The combined company, with $2.2 billion in sales, will be the biggest plastic cup company in the United States. But it's not clear that size alone will be enough to reverse the trends squeezing makers of plastic cups, plates and tableware.
With Sweetheart, Highland Park, Ill.-based Solo picks up a rival weighed down by debt and struggling to keep its production lines running. To make the deal work, Solo must cut the debt and fill the excess capacity.
Solo won't say how much it's paying for its rival, but people familiar with the transaction estimate that Solo, with annual sales of $900 million in 2003, will pay roughly $800 million for Owings Mills, Md.-based Sweetheart, which had sales of $1.3 billion in the fiscal year ended Sept. 28.
Those people also say that figure includes immediate repayment by Solo of more than $400 million in junk-bond debt on Sweetheart's balance sheet. The transaction is expected to close by March.
A broader question is whether the combined company will be strong enough to prop up pricing in the paper and plastic cup industry.
``Big retailers like Wal-Mart and Target are demanding sharper pricing all the time,'' said Thomas Blaige, managing partner at Chicago investment banking firm Thomas Blaige & Co., which focuses on advisory work with plastics and packaging clients.
``Manufacturers are feeling so much pressure that they're deciding they have to either shut down parts of their businesses or merge. It's survival of the fittest, and companies like Solo are taking advantage of the rush to consolidate.''
Consolidation could take out overcapacity at companies like Sweetheart, which didn't return calls seeking comment for this story. Cynthia Werneth, a corporate debt analyst at Standard & Poor's in New York who follows Sweetheart, said some of its 19 plants operate significantly below capacity.
``We have no definitive plans for plant closings at this time,'' said Ronald L. Whaley, chief operating officer and chief financial officer at privately held Solo, which has 14 plants and 12 distribution centers. He will become president and chief operating officer of the new Solo after the merger.
``Sweetheart is a good company, basically. If it weren't, we wouldn't have done this deal in the first place,'' he said.
Some are leery
Smaller customers are wary of the combination. Mark Gregory, the owner of Solo and Sweetheart distributor B&G Paper Products Inc. in central Pennsylvania, said aggressive competition in food-service plastic and paper products - cups, plastic cutlery and dishes - has kept prices falling during the past five years.
``By combining these two names, we will have fewer options in our negotiating and pricing here,'' Gregory said. ``Solo will know that and may figure it can take advantage of that.''
Whaley would not comment on his pricing plans, but Standard & Poor's Werneth points out that rising resin costs during the past two years have put cup makers under relentless pressure.
``With customers demanding lower prices on the one hand and the manufacturers paying more for raw materials on the other hand, most of these companies are feeling profit margin pressures,'' she said.
Sweetheart will give Solo an instant presence in categories such as paper placemats and napkins. Solo is believed by outsiders to be solidly profitable, while Sweetheart eked out a $15 million profit last year and lost $3.1 million the year before as sales have remained flat, according to public filings.
So far, nobody has raised any antitrust objections to the merger.
John R. Burke, president of the Foodservice and Packaging Institute in Falls Church, Va., calculates that Solo operates in an industry that has annual sales between $10 billion and $12 billion, and that is growing just 2-4 percent a year. Solo officials estimate the two companies' combined market share will fall below 20 percent after the merger.
Solo brought on an equity partner, New York's Vestar Capital Partners, to help fund the Sweetheart deal with a $220 million investment, along with a loan of unspecified size from a group of banks headed by Bank of America and Citigroup. Vestar did not return phone calls.