As Tyco International Ltd. again readies itself to sell off its $1.74 billion plastics and adhesives group, question marks align around a potential transaction:
Can the conglomerate sell the unit's disparate pieces as one whole? Are there any strategic buyers who could afford the Tyco operation or even want it? Will financial buyers make the mad dash to the bidding tent that some analysts predict?
And a larger question looms above the rest: How attractive is a property that has cycled through mass acquisitions and then downsizing, numerous management changes and the cresting wave of resin prices?
Declining sales and a mix of unrelated products will make it tough to attract a high price, said David Solomon, managing director of New York-based equity firm Goldsmith Agio Helms. The unit should bring Tyco between $900 million and $1.5 billion, Solomon said.
``The mix is extremely broad and some operations are not real healthy,'' he said. ``One thing they have is large scale. The question is what a buyer can do with it.''
Others disagreed, saying that the unit will be a top sale property.
``They are the No. 1 or 2 company in many of their markets, and everyone wants to buy the market leader,'' said Nick Pavlidis, packaging analyst with Baird Capital Partners in Chicago.
``And as a market-leading company, they can better withstand resin pricing pressure. Those factors could get them a premium price.''
Pembroke, Bermuda-based Tyco plans to divest the plastics and adhesives business this year, and is seeking a buyer that wants the entire operation. The company has hired investment firm Morgan Stanley & Co. and is preparing an initial offering memorandum to go out this month, said Terry Sutter, president of Princeton, N.J.-based Tyco Plastics & Adhesives, in a May 3 telephone interview.
A target price was not disclosed, but Sutter said the company expects to jettison the business as quickly as possible.
``We would not start a process like this and announce it publicly if we were not serious about moving this forward,'' he said. ``The expectation is that both [financial and strategic] groups will look at plastics and adhesives.''
The unit includes a film operation that recorded about $1.1 billion in North American sales last year, according to Plastics News estimates. The business makes pallet stretch films, agricultural films, institutional can liners, trash bags, retail sheeting and both multilayer and shrink bundling film.
The unit also includes injection molded garment hangers, made by the company's A&E Products group. That operation is the dominant producer of hangers worldwide, but has been struggling operationally, Sutter said. The group incurred a $200 million asset-impairment charge last quarter.
Overall, the plastics and adhesives business has 51 plants and about 9,500 employees.
In a quarterly conference call with analysts May 3, Tyco Chairman and Chief Executive Officer Ed Breen said the plastics and adhesives operation has shown nice sales growth, but has been beset by thin profit margins. Selling the unit will free cash flow for other Tyco units, especially its thriving health-care business, Breen added.
The plastics and adhesives unit recorded a profit margin of 4 percent last year, according to Tyco's annual filing. The business brings in the lowest gross margin of any Tyco unit, Sutter said. The unit posted operating profit of $69 million last year.
A sale would pull Tyco Plastics & Adhesives from under the wing of a $40 billion company with much larger operations in other products. While Tyco has made many positive operating changes, his unit might grow more quickly on its own, Sutter said.
``We'll have more access to capital to do acquisitions, build on technology and gain market presence,'' Sutter said. ``The film business has performed exceedingly well since I got here in 2003, and we've improved income by about 30 percent year after year. What we need to do is to continue to get a bigger, broader plastic film and adhesive business.''
This is not the first time Tyco has tried to sell the plastics operations. In early 2002, under different management, Tyco publicly put the business on the market, and there was rumored interest from several large equity firms. However, any movement fell through after those potential buyers questioned Tyco's financial statements, according to sources at the time. Soon after that, Tyco's top management resigned after an investigation was launched into the company's accounting. The unit was pulled from the market.
Since then, new Tyco management has shored up the plastics and adhesive unit, closing 30 plants and laying off about 1,000 people.
In the conference call, Breen said the unit is in better shape for a sale today and has become a more attractive property.
``Our moves ... have improved the factory footprint of this business,'' Breen said. ``That was our Achilles heel going into this process before.''
With interest rates still relatively low and a lot of equity firms chasing companies for their funds, the bidding could be intense from financial firms, said Louis Mitchell, managing director of Chicago-based investment firm Mesirow Financial Inc.
``I would expect robust action from the financial markets,'' Mitchell said. ``There's a lot of money out there to put in play and a lot of big financial sponsors that could team up together. Financial buyers are as competitive as any time I've ever seen.''
Yet, the market for plastics packaging properties might not be as sizzling as some analysts expect. A midsize blow molding company, Liquid Container LP/Plaxicon Co. of West Chicago, Ill., recently took itself off the market after not generating the price it wanted, according to several sources.
With many packaging companies having middling first quarters, and high resin costs, some financial buyers have become cautious.
``There's not necessarily a wall of money [from financial firms] waiting to bail out packaging companies with high multiples,'' said Tim Burns, president of Solon, Ohio-based packaging equity firm Cranial Capital Inc. ``I think there's been a rush to market, but I see it slowly turning in favor of buyers.''
Still, financial buyers may see a short window of opportunity before interest rates rise and bank lending tightens again, Burns said. He expects financial firms to at least dip their toes in the water with Tyco.
Tyco competitors are another story. Three film companies contacted by Plastics News all said they have no interest in Tyco's business. The many shifts in management and the capacity downsizing made a few of them wary of how well the business is run.
Most of Tyco's film operations are commodity items that take constant commitment to make money, said Alfred Teo, chairman and chief executive officer of Lyndhurst, N.J.-based film producer Sigma Plastics Group.
``It's a penny business, and you watch your pennies and watch your overhead,'' Teo said. ``You have to constantly watch your store or you can lose money when you are wide awake.''
Another top packaging executive said the industrial film business that is a strong part of the Tyco unit is not extremely profitable in North America, due to resin price hikes and global competition.
``Those are all reasons that we have to continue to fight to find ways to survive,'' the executive said. ``It is not necessarily something you want more of.''
Most film companies could not afford Tyco Plastics & Adhesives, especially if it is sold as one piece, said Mesirow's Mitchell. The unit could command a higher price if Tyco broke up the businesses, but that would take much more time to sell, he said.
But like three years ago, a rush of the world's largest equity firms could descend on Tyco looking for new portfolio pieces. Whether they pay a price dictated by Tyco remains to be seen.
``Tyco would love to get rid of it, but at the highest price they can,'' Burns said. ``For a financial sponsor, it could be a big juicy deal that provides a way to tie up funds that aren't being put to work yet. But we'll have to see if that happens.''