Updated — Berry Plastics Group Inc.'s $765 million deal to acquire flexible packaging films maker AEP Industries Inc. involves some inspired math, according to one man behind the deal.
“This is truly the classic example of an M&A transaction where one plus one not only equals three, but meaningfully more than that over time as we fully integrate these two great organizations,” Berry Plastics CEO Jon Rich said just a few hours after the deal was announced Aug. 25.
Berry not only sees Montvale, N.J.-based AEP as a complementary acquisition for its Engineered Materials division, but actually a way to help lower its debt-to-earnings ratio more quickly than previously planned.
Berry Plastics is paying a 50-50 combination of cash and stock for AEP and said savings that will be experienced by combining the operations will help the company accelerate debt repayments.
Evansville, Ind.-based Berry, after its deal last year to acquire nonwovens maker Avintiv Inc., has been preaching a sermon of debt reduction on recent earnings conference calls.
AEP brings 14 manufacturing locations in both the United States and Canada to Berry Plastics, which has 28 sites of its own.
“We have been familiar with AEP for a long time. We've long admired the accomplishments and thought that the combination with Berry would be attractive,” Rich told stock analysts on a conference call to discuss the proposed deal.
“But I would say the first contact for us to become involved was after AEP concluded their own strategic evaluations and retained some advisers and those advisers reached out to us,” he said.
“Once we assessed that we could complete this transaction and complete it in a manner that was consistent with our top priority of accelerating or maintaining the pace at which we were deleveraging the company, we moved ahead,” Rich said.
Berry Plastics will pay either $110 in cash or 2.5011 shares of Berry Plastics stock for each AEP share.
The ratio of payments is subject to a split between cash and shares “to ensure that 50 percent of the total outstanding AEP shares are exchanged for cash consideration,” Berry Plastics said.
AEP shareholders will own 5 percent of Berry Plastics on a fully diluted basis once the deal closes.
Certain AEP executives and directors who beneficially own 21.5 percent of the company's stock already have agreed to vote for the deal.
Berry is using its shares as currency in the deal at a time when they are trading about 50 percent higher than they were a year ago. For AEP shareholders, the $110 price per share represents a 43-percent premium to the closing price of $76.97 on Aug. 24.
“We think we have built a very strong and valuable company. However, the value of our company, in our opinion, is not accurately reflected in our stock price. And we have been committed for a number of years to improve shareholder value. And we believe that that's exactly what we're doing in this transaction,” AEP Chief Financial Officer Paul Feeney said.
“Any public company has to treat all its constituents fairly. And those would be your employees, your customers, your suppliers, the community in which you operate, but most importantly your owners,” he said.
“We have not always done that. We have not been able to do it. It's not like we went out of our way to mistreat our shareholders, but our stock price did not reflect the value of our company. And we believe now that it does. It's not more complicated than that,” Feeney said.
$50 million in annual savings
Curt Begle, president of the Engineered Materials division, said it is too early to have any type of discussions regarding plant rationalization or changes.
But Berry Plastics did say it expects to save a minimum of $50 million per year by combining the operations, including money spent on sourcing raw materials, operations and selling, general and administrative expenses.
Acquiring AEP will boost Berry Plastics polyethylene purchasing by about 1 billion pounds per year, giving the company more muscle with resin suppliers.
Key products for AEP include custom films, stretch wrap, food contact film, can liners, and printed and converted film for food and beverage packaging. These are areas that all overlap with what Berry Plastics is already producing.
Because the two operations are so similar, Berry Plastics officials said they are confident the integration will go smoothly.
“There are strategic, tactical and economic reasons why we believe this is a very attractive transaction for Berry shareholders. There are compelling cost synergies that we are conservatively forecasting at $50 million per year,” Rich said.
“We view these synergies to be low risk, highly achievable and on the conservative side of the synergies we would typically achieve with our past acquisitions,” said Berry Chief Financial Officer Mark Miles.
AEP brings 2,600 employees to Berry Plastics in a deal that expected to close later this year. AEP had net sales of $1.1 billion during the four quarters ended in April with net profit of $39 million and adjusted earnings before interest, taxes, depreciation of amortization (EBITDA) of $103 million.
Berry ranked No. 8 on Plastics News' most recent survey of North American film and sheet manufacturers, with estimated relevant sales of $980 million. AEP ranked No. 6.
AEP dates back to 1970 and was founded by Brendan Barba, who currently is CEO of the company.
A research note from Senior Analyst Christopher Manuel at Wells Fargo called the acquisition “strategically sound.”
“We believe AEP is a clear strategic fit with [Berry Plastics] given its complementary product set in flexible packaging serving consumer, industrial and agricultural ends markets,” Manuel wrote.
Feeney said the combined company will be able to provide better service.
“We think we're going to end up with a situation where our customers on an overall basis will be better served. We think this is good for the market,” he said. “We are anxious to complete this deal. We believe it to be in the best interest of AEP shareholders, our employees and certainly our customers.”