Even the leader of the mergers and acquisitions team at Berry Plastics Group Inc. does not blame anyone for not quickly seeing the rationale for his company's $2.5 billion deal for Avintiv Inc. That's because he didn't either, at first.
But as Brett Bauer started digging deeper into the opportunity, it became clear that buying the world's largest nonwovens manufacturer from investment firm Blackstone Group was a very good idea, he said.
“People, at first blush, they are probably not overly familiar with the asset,” said the executive vice president of strategic corporate development. “The fit becomes more obvious the more you get educated about the business.”
Berry Plastics generates about half of its sales through flexible packaging and the other half through rigids. Avintiv mostly manufacturers and sells polypropylene and polyethylene flexible nonwoven products that are then converted by others into a wide variety of consumer and industrial products.
Similarities between the flexible packaging and nonwovens businesses, along with the fact that both companies use a great deal of PP, are two reasons why the merger is attractive, he said.
“It's not outside our core. It may be to the casual observer, but it's not outside. Really, it's adjacent to it, and very closely adjacent to it,” Bauer said.
Producing nonwoven products at Avintiv has a lot in common with producing flexible films at Berry Plastics. “You basically are processing it in a very similar manner,” he explained.
Avintiv, which was in the process of an initial public offering, pivoted this summer and instead put itself up for sale through a bidding process. And a quick one at that.
“The timing moved very fast,” Bauer said. There was a management presentation in June and bids were due in July. A deal was announced before the month was over.
Berry Plastics was obviously interested in kicking the tires on Avintiv when approached about potential interest. But it was only when the curtains were pulled back on the business — during the management presentation and through the sharing of confidential information — that it became clear to Berry Plastics that the deal made sense.
“We're trying to be a disciplined buyer in what we do. And we're looking for the other opportunities that might not be abundantly obvious to somebody else,” Bauer said.
For Avintiv CEO Joel Hackney, joining forces with Berry Plastics allows the company to accomplish goals that made an IPO make sense at one point.
“For us, we were pursuing the IPO to really continue driving our growth,” Hackney said, including providing access to capital and giving the company greater brand awareness.
“This, in brief, was an opportunity we couldn't pass up. This allowed us to bring all of the objectives that we had for an IPO to fruition and additional benefits,” the CEO said.
“By joining with Berry, we accomplish all of those and more. We not only become a public company as Berry Plastics is public, we get more access to capital to drive our growth agenda,” Hackney said.
“But we also,” he said, “get the further benefit of creating an even stronger business by taking two very successful businesses and combining them.”
Berry Plastics is taking a big swing with the acquisition.
Avintiv adds $2.1 billion in annual sales to Berry Plastics, pushing the yearly total to more than $7 billion.
It's a far different company now than when Blackstone purchased the firm in 2011 for of $403.5 million,
Avintiv calls itself the largest global maker of nonwovens, but that has not always been the case. And up until two months ago, the company wasn't even called Avintiv.
Formerly known as PGI Specialty Materials Inc., the company with 23 locations in 14 counties renamed itself in the middle of the IPO process. Sales have increased from about $1 billion two years ago to an annual run rate of $2 billion today.
The company acquired Fiberweb, described as one of the largest global manufacturers of specialized technical fabrics, in November 2013 in a $287.8 million deal that added eight production sites in six countries. Avintiv, then PGI, also purchased Providência in June 2014 for $424.8 million, a move that included three nonwoven manufacturing operations — two in Brazil and one in the United States.
And it was just earlier this year that Avintiv acquired Dounor, a single-site maker of nonwovens used for hygiene, health care and industrial applications. Dounor is based in Neuville en Ferrain, France, and has a strong presence in adult hygiene products.
Mixed reaction
Stock analysts were not uniform in their reaction to the acquisition.
Wells Fargo Securities, in an analysts' note, had a positive outlook on the company while keeping its “outperform” rating for Berry Plastics stock. Wells Fargo said any concerns about the Avintiv deal “do not reflect the long-term growth potential of the acquisition.”
Standard & Poor's Ratings Services, meanwhile, said its ratings and outlook for Berry Plastics is unaffected by the acquisition.
“The acquisition adds scale, new product lines, and geographic diversity to Berry's existing business,” S&P wrote in a bulletin discussing the deal.
Stock analyst Ghansham Panjabi of Baird Equity Research, in a research note, said the acquisition “represents an attractive acquisition on both a revenue-added and margin basis.”
Volatility of Berry Plastic Group's stock in the days immediately following the acquisition announcement was “partly due to the lack of transparency on many different levels, including the timeline for synergies, financing (debt/equity combination), and also the reality that the core businesses remain under pressure,” Panjabi wrote.
But Goldman Sachs downgraded the stock to “neutral” after the deal was announced, according to reports.
Berry Plastics expects to realize $50 million in annual savings within three years by combining the two companies. “The vast majority of those, as we see it, will be in year one and year two,” Bauer said.
Bauer pointed to the fact that many of Avintiv's top customers also are customers of Berry Plastics.
“We're already making a lot of film products and a lot of film products going specifically into the hygiene and health care space,” he said, for example. “And a good portion of this business is doing the same thing.”
“It really is a natural fit,” Hackney said.