Sonoco Products Co. is adding to the plastics side of its packaging business, announcing Oct. 10 that it intends to acquire Tegrant Corp. from New York-based private equity firm Metalmark Capital LLC for $550 million. The deal is expected to close in November.
Sonoco Chairman and CEO Harris DeLoach Jr. said during an Oct. 10 conference call to discuss the deal that the acquisition of Tegrant is the largest in Hartsville, S.C.-based Sonoco's history.
In Tegrant, Sonoco found a company with good leadership, similar values and culture, and a commitment to its customers, he said.
“This [acquisition] does raise our debt-to-capital ratio and our leverage ratio higher than we traditionally have it. Our main focus over the next 18 months will be on getting this thing integrated and paying down some debt,” DeLoach said.
The addition of Tegrant will give Sonoco access to growth markets, particularly medical and retail club stores; will help Sonoco grow its consumer and industrial businesses; and will allow for a greater diversity of packaging offerings in plastic, foam and paper, he said.
Tegrant is projected to generate 2011 sales of about $440 million. Next year's sales for Sonoco and Tegrant together are expected to be about $5 billion.
Sonoco's combined protective packaging businesses will represent about 11 percent of its ownprojected 2012 sales, DeLoach said. Tegrant will give Sonoco immediate access to growing markets like medical devices, pharmaceuticals, and health and beauty, while providing it greater access to a variety of industrial components and auto markets, he added.
DeLoach said Ron Leach, Tegrant's president and CEO, will continue to lead Tegrant's businesses.
John Colyer, vice president of Sonoco's global industrial converting division, will be given expanded responsibility for the firm's global protective packaging, tubes and cores, and wire and cable reels businesses.
Jack Sanders, Sonoco president and chief operating officer, said during the conference call that Tegrant took steps in recent years to right-size its operations, and targeted end markets with 3-5 percent projected annual growth.
“The combination of Sonoco and Tegrant creates a powerful growth engine that is either No. 1 or No. 2 in the targeted growth markets,” he said.
According to Securities and Exchange Commission filings, consumer packaging makes up about 40 percent of Sonoco's business, and industrial packaging the rest.
The Tegrant acquisition is expected to be accretive to Sonoco's 2012 pro forma earnings by about 10 cents per diluted share, including estimated adjustments for purchase accounting and about $11 million of expected synergies.
Sanders said internal teams and outside consultants are working to integrate Tegrant's business into Sonoco.
The price of the acquisition, adjusted for expected tax benefits, is about 6.8 times Tegrant's estimated pro forma 2011 earnings before interest, taxes, debt and amortization of $74 million.
The deal is expected to be financed from existing cash and debt with an estimated credit leverage ratio of 2.2x EBITDA at closing.
Sonoco intends to reduce the incremental debt using free cash flow over several years. Chief Financial Officer Barry Saunders said Sonoco met with ratings agencies Standard & Poor's and Moody's, and while the company has not received feedback, it expects the Tegrant deal to have little impact on its credit.
Ghansham Panjabi, a senior analyst with Robert W. Baird & Co. Inc. in Milwaukee, said in an email that the deal makes strategic sense, as it adds considerable critical mass to Sonoco's existing protective packaging business.
“Also, it gives them some differentiated technologies [temperature-sensitive products] that they should be able to leverage across their customer base.
“[The acquisition] fits with our view that if core growth starts to slow, given macro uncertainty, then companies with strong balance sheets will very likely deploy cash towards mergers and acquisitions,” Panjabi said.
In a note to investors, Baird advised that the deal should result in a modest positive for Sonoco shares.
Tegrant is based in DeKalb, Ill., and operates three strategic business units: Protexic Brands, a maker of molded expanded foam for custom packaging that operates 15 plants and employs 1,000; ThermoSafe Brands, which provides temperature-sensitive pharmaceutical and food packaging, has eight plants and employs 500; and Alloyd Brands, a maker and designer of high-visibility packaging, printed products and blister packaging machines, which employs 800 at eight plants.
All together, Tegrant runs more than 30 manufacturing, design and testing facilities in the U.S., Mexico and Ireland and employs more than 2,000. Four of those plants were added after Protexic purchased Indianapolis-based Createc Corp., a manufacturer of highly engineered, custom molded foam products, in January.
Macquarie Capital served as financial adviser to Sonoco; Sagent Advisors to Tegrant.
Sonoco officials recently set a sales goal of $6 billion by 2014, and the Tegrant deal brings that closer to fruition, DeLoach said.
Sonoco operates 315 locations in 34 countries, with about 17,000 employees. It had sales in 2010 of $4.1 billion.