Investors to Berry: Sell noncore units, show off sustainability

Investment firm Canyon Capital Advisors is pressuring plastics packaging maker Berry Global Group Inc. to sell off businesses to boost its financial performance and more aggressively communicate about environmental issues and its packaging.

Los Angeles-based Canyon, which advises funds owning almost 7 percent of Berry shares, urged Berry President and CEO Tom Salmon in a Feb. 23 letter to hire an investment bank to improve the company's financial performance, lower debt and "get in front … of market misperceptions about sustainability" of plastic packaging.

Berry responded in a statement that it was focused on three strategic initiatives: generating profitable organic growth, integrating last year's purchase of RPC Group with an "intense" focus on cost savings and continuing to look for businesses to divest from. As well, the company defended its work and communications around plastics sustainability.

On the business side, Canyon said Berry's stock is "significantly undervalued" compared with peers in the packaging sector, with flat returns last year while its peer group stocks rose 34 percent and the S&P 500 rose 29 percent.

It said that trend has continued this year, with Berry's stock down 6.8 percent while its peers are basically flat at 0.6 percent and the S&P is up 3.3 percent.

"We think that accelerated deleveraging by making targeted divestitures of noncore assets is critical at this stage to improve [total shareholder return]," Canyon wrote. "Canyon believes the company should immediately retain an investment bank or other financial advisor to evaluate and provide guidance."

Canyon pointed to Berry's decision last year to sell its Seal for Life Industries LLC unit for $328 million to Arsenal Capital Partners. Seal for Life makes products for infrastructure maintenance, including plastic mesh to protect pipes from rocks during backfilling operations.

Canyon said it believes Berry stock trades at values lower than it should in part because of its debt levels.

It said it recognized steps management has taken in response to earlier correspondence, like a $500 million stock repurchase program in 2018 and the acquisition of RPC Group in 2019 for $4.4 billion.

"We believe Berry has acquired the global scale and innovation to lead the packaging industry into a sustainable future," Canyon said. "However, at this point more should be done to unlock value for shareholders."

Berry, however, defended its business strategies.

"Our board and our management team regularly review our operational portfolio and capital allocation to ensure that we are best positioned to drive shareholder value, including through divestitures, in order to maintain our strong balance sheet and proven track record of free cash flow growth," the company said.

The investment firm urged Berry to be more aggressive in communicating about plastic packaging and environmental issues, pointing to Nestlé SA's announcement in January that it's spending $2 billion to develop a market for food-grade recycled resin.

"Canyon also believes that Berry should get in front of [environmental, social and governance] trends and correct market misperceptions about the sustainability of its products," the firm said, saying Berry was "extremely well-positioned" to point to its scale, product development strength and partnership with consumer product companies to use recycled content.

It said that anticipated volume growth at Berry would counter the argument that plastics are "unpopular from a sustainability perspective."

Canyon argued that aluminum can makers are benefiting in their market value from market perceptions.

"It is readily apparent that the market has embraced the sustainability narrative as it relates to aluminum can makers, which are being valued well above historical average multiples," Canyon said. "We believe very strongly that Berry and the rest of the plastic packaging supply chain has an equally compelling sustainability story to tell and we think the company's efforts to do so can be more focused."

It pointed to plastics having a role in reducing food waste and said plastics compare favorably to other materials from an environmental standpoint. It noted, however, that improving recycling rates for plastics would help get out that message.

Canyon noted Berry's recent work with materials supplier Saudi Basic Industries Corp. around chemical recycling of polyolefins and an agreement with Georgia Pacific Recycling to create a closed-loop system for recycling post-consumer film and other materials.

Berry countered that it remains "deeply focused" on sustainability, working with its customers and communicating environmental benefits of its plastic packaging.

"We work directly with customers to reduce plastics waste and meet their sustainability goals, as well as communicate how the impact of lighter weight plastics that require less carbon emissions to produce, and growing rates of recyclability and use of recycled resin, reflect how plastics are making a substantial positive contribution around the world," Berry said.

In the last year, Berry, which is North America's largest plastics processing company, has taken a number of steps aimed at improving the sustainability footprint of plastics packaging.

In January 2019, it became one of the founding members and financial supporters of the $1.5 billion industry-funded Alliance to End Plastic Waste and issued its first sustainability strategy in April.

In that strategy, it outlined a number of steps, including using more recycled content in its packaging and reducing its own greenhouse gas emissions by 25 percent by 2025.