Pactiv Corp. of Lake Forest, Ill., scored a coup in the world of plastics disposable tableware, acquiring a company it has courted for nearly seven years in a $1 billion debt-financed transaction.
Pactiv's April 12 announcement that it is taking over Prairie Packaging Inc. of Bedford Park, Ill., means Prairie's founders, the Shapiro family, will step aside. Although other management will stay intact, patriarch Earl Shapiro is retiring and sons Ben and Matthew are undecided about what their future holds.
The transaction is expected to close in the second quarter.
``We've told [Pactiv] that we're very happy to assist in any transition,'' Ben Shapiro said in a telephone interview. ``Pactiv can provide that management and capital that industry can support and that customers require. In Pactiv, we believe we found the perfect successor to keep that growth model.''
The numbers show a business that has been well-managed since its 1987 founding. Prairie in 2007 will produce $500 million in sales with a profit margin around 20 percent, predicts analyst Ghansham Panjabi of Wachovia Capital Markets LLC in New York.
Prairie's earnings before interest, taxes depreciation and amortization are 23 percent, compared with Pactiv's 20 percent, Panjabi wrote in an April 12 research note.
The purchase price is roughly 8.6 times Prairie's 2007 expected EBITDA of $116 million, Pactiv officials said during an April 12 conference call.
``This is a large acquisition for Pactiv,'' said Pactiv Chairman and Chief Executive Officer Richard Wambold. ``It's one that the management team will be focusing on and giving its full attention to. We've been negotiating with and getting to know this company for six years to seven years. The fit is as good as it gets.
``This is probably the best opportunity in the market today for Pactiv. The synergies will be excellent on the cost side and in terms of long-term growth.''
During the past few years, Pactiv has elected to pass on other deals, officials said. On a long-term basis, free cash flow will be 8-10 percent of Prairie's total sales.
``Prairie is truly an economically favorable deal,'' Wambold said. ``This is an excellent example of what patience can yield.''
Pactiv officials have been straightforward in their approach to growth. Since 2000, the company has spent $323 million on acquisitions, according to its 2006 annual report. Rather than build new facilities or invest in other ways to grow the business organically, the firm obtained what Wambold called ``instantaneous critical mass'' through Prairie.
``To do the same thing internally, we probably wouldn't really have a great return on it,'' he said. ``We're really happy with this way of accomplishing the goal.''
Prairie constantly has reinvested in machinery and automation, and Pactiv will continue that strategy. Prairie's newest facility, in Charlotte, N.C., will undergo an expansion, Wambold said.
``Eventually, we'll think about where we'll go next - possibly the West Coast,'' he said.
Pactiv also will adopt automation tricks from Prairie's five plants at Pactiv's existing facilities. Prairie's operations include injection molding and thermoforming. It employs 1,200.
The principle difference between the Pactiv and Prairie cultures is that Prairie is very aggressive in getting things done, Wambold said.
``That's a part of their culture that we want to embrace, as opposed to remove,'' he said.
Prairie makes higher-margin products. Its sales are split 60-40 between food-service and consumer products, respectively. Pactiv's sales are split 63-37 in food-service/food-packaging and consumer products, respectively.
In terms of customer mix, Pactiv sells to Wal-Mart Stores Inc., which accounted for 16 percent of Pactiv's sales in 2006. Prairie sells to Sam's Club, but not to Wal-Mart.
Panjabi rated publicly held Pactiv's stock at outperform. He also said Pactiv is likely to consolidate the food-service packaging market further during the next few years.