Pactiv Evergreen says $380M acquisition of Fabri-Kal ‘made a lot of sense'

Pactiv Evergreen Inc. says it is facing challenges brought on by the pandemic, inclement weather and labor shortages, but the acquisition of Fabri-Kal Corp. was too attractive to pass up. So Pactiv is buying Fabri-Kal in a $380 million acquisition that initially will add to its debt level, but then immediately help the new owner's bottom line.

Lake Forest, Ill.-based Pactiv Evergreen said Sept. 8 the purchase is expected to close late in the third quarter or early in the fourth quarter.

News of the purchase comes on the same day Pactiv Evergreen told the market not to expect as much profit from the company this year as previously anticipated.

But purchasing Fabri-Kal, the 11th-largest thermoformer in North America, according to Plastics News data, is expected to bring cost savings to the combined company.

Pactiv Evergreen is the largest thermoformer in North America, according to the latest PN ranking, with an estimated $2.6 billion in annual sales.

"The largest bucket of synergies is the operational synergies. We've taken a very close look at the Fabri-Kal facilities and the Pactiv Evergreen facilities and we think there is opportunity to get a lot more production out of both by combining the production footprint," said Mike Ragen, who serves as both chief operating officer and chief financial officer at Pactiv Evergreen. "I'm not saying closing plants when I say that. It's more about moving product around between the facilities.

"That's the bulk of it," he said.

A total of 72 percent of Fabri-Kal's business is in foodservice and the remaining 28 percent is in consumer products.

Fabri-Kal, of Kalamazoo, Mich., has annual sales of $334 million. The purchase, Pactiv Evergreen said, "is subject to adjustments for cash, working capital and indebtedness." Fabri-Kal has four manufacturing sites in the United States and about 1,000 employees.

While Pactiv Evergreen is not talking about closing sites, the company told stock analysts on a conference call to announce the deal there continues to be problems attracting enough workers around the company.

"The labor [shortage] is inhibiting our sales. Over the last few months, we have dramatically reduced our inventories because we have been selling more than we have been producing," Ragan said.

"The assumption that we had most recently was that we would get more labor back in, and it's been very difficult. So we've taken a breath. We're continuing to push down that path, but we're sitting here saying, 'Realistically, by the end of the year, where do we think our production levels will be,' and we've adjusted for that," Ragen said.

Pactiv Evergreen expects to use a combination of debt and cash on hand to pay for Fabri-Kal.

The company's latest earnings guidance is for adjusted earnings before interest, taxes, depreciation and amortization to come in at $550 million for the full 2021 fiscal year. It was only in early August, during the company's second-quarter earnings conference call, that Pactiv Evergreen said it expected adjusted EBITDA to come in at $630 million to $645 million for the full year.

Company officials were asked why they decided to buy Fabri-Kal at a time when Pactiv Evergreen is facing its own set of financial challenges. CEO Mike King essentially said this deal was very specific and the company is not casting a wide net in search of deals these days.

"I would say we're taking rifle shots. Fabri-Kal is something that came up several quarters ago and was something we looked at a long time before we acted. I would say that's the mode we are in," he said.

"This one made a lot of sense," King said. "This one, obviously, is deleveraging. There aren't many of those out there I would say."

Fabri-Kal's product line includes drinking cups, lids, portion cups and containers. It was founded in 1950 by Robert Kittredge. The sale will move the family-owned business into a publicly traded company.

Pactiv Evergreen is the former Reynolds Group Holdings Ltd. It went public last year as part of a larger push by billionaire Graeme Hart to pay down debt on his vast holdings. The company has 53 manufacturing sites and a portfolio of 13,000 products, including food containers, plates, bowls, cups, lids, wraps, cutlery, trays and egg cartons.