A bidding war has broken out for control of Pactiv Corp., the maker of Hefty trash bags, and at least one potential combination would change the landscape of packaging, one industry analyst said.
The companies in question did not comment, but a person close to the negotiations said several offers are being considered, and analysts said the packaging segment is due for consolidation.
Private-equity firm Apollo Global Management of New York is in talks to buy the Lake Forest, Ill., packaging giant, according to stories in The Wall Street Journal last week. Packaging firm Georgia-Pacific Corp. of Atlanta and New Zealand-based Rank Group Ltd. also are queued up to bid.
Pactiv has about $1.5 billion in debt, and any acquisition would be among the largest leveraged buyouts in two years, according to WSJ, which said any deal is a few weeks away and faces several hurdles.
Pactiv reported first-quarter profit of $48 million on sales of $777 million, compared with profit of $77 million on sales of $766 million for the year-ago period. For 2009, Pactiv reported sales of $3.9 billion.
Opinions among industry-watchers on the news that Apollo and Pactiv are in talks varied, with several analysts saying the time is ripe for packaging consolidation.
We have strengthening leverage, strengthening capital markets, and strong and resilient performance in the packaging sector. That's really attracting capital into the sector, said Will Frame, managing director at Deloitte Corporate Finance LLC's Chicago office, in a May 17 phone interview.
John Hart, co-leader of the plastics and packaging team at P&M Corporate Finance LLC in Southfield, Mich., said the size of the potential deal shows credit is becoming avaialable again, returning to the marketplace, and that the overall mergers and acquisitions are heating up in 2010.
From an investment banking standpoint, it's pretty encouraging to see, Hart said.
The potential deal reflects the drivers of the ongoing global consolidation, including the large scale needed to serve global customers, according to plastics and packaging M&A consultant Tom Blaige. Other pressures include purchasing economies for raw materials and the convergence of top-ranked capabilities in key packaging sectors thermoforming, injection molding, film and bags, said Blaige, CEO of Chicago-based Blaige & Co.
Finally, there is a strong opportunity to expand Pactiv into global markets, he said.
In the wake of the Apollo story breaking, Standard & Poor's placed Pactiv on CreditWatch with negative implications. As of March 31, S&P said, Pactiv had $2.1 billion of debt, including $160 million under its revolving credit facility to help fund its recent $200 million purchase of PWP Industries Inc. of Vernon, Calif. PWP was one of Pactiv's rivals in the production of amorphous PET for food-service packaging.
We expect to resolve the CreditWatch following a review of additional information related to the potential for a leveraged buyout, S&P analyst Cynthia Werneth said in a May 17 news release.
Analyst Ghansham Panjabi said, In this particular case, it seems like [Apollo's] motivation is to acquire Pactiv, add it to an existing company Berry Plastics and then create a plastic packaging powerhouse, and then do something with it, maybe eventually taking it public.
Panjabi, with Robert W. Baird & Co. in Milwaukee, estimates Pactiv eventually will sell for $34-$38 a share, which would value the company at as much as $5 billion based on the number of shares outstanding April 30. Panjabi has an outperform rating on the shares.
If the deal goes through, he said, there are likely to be redundancies across the assets of both packaging companies. For example, through Berry's merger with Covalence, which formerly was part of Tyco Plastics, Berry broadened its reach beyond rigid packaging into flexible packaging.
Berry has a brand called Ruffies on the waste-bag side. Pactiv has, of course, Hefty and they're starting a new private-label [bag]. So they do have some overlap and they're gong to have to figure out how to deal with that, Panjabi said.
Hart agreed Berry is a likely fit for a merger with Pactiv: These other parties at the table obviously drive the prices up for the shareholders. A Berry-Pactiv combination, in the event that they end up doing that, would change the landscape of packaging.
Georgia-Pacific, Apollo and Rank all have significant holdings in plastics that potentially could be combined with Pactiv.
Rank, owned by Auckland, New Zealand, billionaire Graeme Hart, owns Reynolds Packaging, which makes aluminum foil and plastic wrap and bags; and its unit that molds plastic closures for the beverage industry. Rank also owns packaging machinery manufacturer SIG Holding AG.
Georgia-Pacific of Atlanta is a major packaging thermoformer.
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