Liquid Container LP and Graham Packaging Co. Inc. are two of the largest blow molders in North America, and they serve similar markets. But despite their similarities, Graham CEO Mark Burgess says the two will fit together quite nicely.
York, Pa.-based Graham announced Aug. 9 that it signed a deal to buy Liquid Container and its subsidiaries for $568 million.
Graham's criteria for making acquisitions are well-defined, Burgess said. We're only interested in acquisitions that provide Graham with exposure to new geographies, new technologies, and new adjacent markets and products that distance themselves from shared commodity business.
West Chicago, Ill.-based Liquid Container was one of the few that met [Graham's] acquisitions criteria for North America, he said. The company has 14 blow molding plants all in North America and expects to generate earnings before interest, taxes, depreciation and amortization of $72 million on sales of almost $400 million in 2010.
Burgess said Liquid Container's customers complement Graham's, with very little overlap.
During an Aug. 9 conference call with investors, he said 80 percent of Liquid Container's sales are in food and beverage containers, and 20 percent in household goods. Seventy percent of the firm's sales come from its top 20 customers of which Graham currently does business with just eight, he said.
Graham's focus has been on serving large, multinational clients, while Liquid Container has targeted midsized players, he said, a situation that creates synergistic opportunities for both companies.
The firms have similar lean-manufacturing philosophies and cost structures, Burgess said. The acquisition will boost Graham's presence in the South and on the West Coast. He also cited hot-fill technology developed by Liquid Container as a particular selling point.
Graham plans to fund the acquisition with debt, and has arranged for financing. The deal is scheduled to close this year.
Packaging industry analysts say the deal is consistent with recent large-scale acquisitions in the segment, with strategic players leveraging debt to add new market presence, production facilities and technologies to existing businesses.
The packaging sector continues to consolidate, said David Evatz, a director in the investment banking group at Stout Risius Ross Inc. in Chicago.
For strategic buyers, [that means] really sticking to their core compentencies and not deviating too far from that. Given where the financing markets are even though they've improved it's still difficult to compete with a strategic [buyer] that has excess cash and debt capacity, Evatz said by telephone.
Will Frame, managing director at Deloitte Corporate Finance LLC's Chicago office, said Graham's move is unlikely to be a defense against pressure from overseas competitors.
The Europeans say, Alpla and Logoplaste are focused on a more hole-in-the-wall, dedicated-plant type of solution and the U.S. players are focused on using a sensible footprint of plant to supply their customers. This [acquisition] is extending Graham's offering more into non-beverage food [applications] and building out a complete offering to compete with the European guys, Frame said.
York-based Graham was the No. 1 North American blow molder in Plastics News' 2009 ranking, with relevant sales of $2.2 billion; Liquid Container was 14th.
For the second quarter of 2010, the firm reported profit of $90.8 million on sales of $652.8 million, vs. profit of $76.4 million on sales of $585.7 million for the year-ago period.
The company is partly owned by New York-based private equity firm Blackstone Group.
Graham earlier in 2010 entered the China market for the first time, with the purchase of China Roots Packaging Pte. Ltd., a plastic container manufacturer in Guangzhou. Graham has set an aggressive target of reaching $300 million in sales in China and Asia within five years.
Graham launched an initial public offering Feb. 10, selling 16.7 million shares. The stock traded near the $13 mark for the week of Aug. 8.