Packaging analysts like potential for Pactiv deal

The Wall Street Journal reported 17 May that private-equity firm Apollo Global Management of New York was in talks to buy Pactiv. On 18 May, the newspaper reported that packaging company Georgia-Pacific Corp. of Atlanta and New Zealand-based Rank Group Ltd. had queued up to bid on Pactiv of Lake Forest, Ill.

Pactiv has about $1.5 billion in debt, and any acquisition deal would be among the largest leveraged buyouts in the past two years, according to the Journal. The newspaper said any deal is a few weeks away and faces several hurdles.

Spokesmen for Pactiv and Apollo would not comment on the reports, although a person close to the negotiations said several offers are under consideration A Georgia-Pacific spokesman would not comment; officials from Rank Group were unavailable for comment.

Pactiv shares soared more than 20 percent May 17 to $29.41 per share, eclipsing the previous 52-week high. The stock traded at a 52-week low of $19.64 in June 2009.

Pactiv in April said its first-quarter 2010 profit was $48 million on sales of $777 million, compared to profit of $77 million on sales of $766 million for the year-ago period. For 2009, Pactiv reported sales of $3.9 billion.

Georgia-Pacific, Apollo and Rank Group all have significant holdings in the plastics industry that potentially could be combined with Pactiv.

Rank, owned by Auckland, New Zealand, billionaire Graeme Hart, owns Reynolds Packaging, which makes aluminum foil and plastic wraps and bags; and its closure systems unit, which makes plastic closures for the beverage industry. Rank also owns packaging machinery manufacturer SIG Holding AG.

Atlanta-based Georgia-Pacific is a major packaging thermoformer, and it also owns a reusable plastic container business.

New York-based Apollo owns packaging behemoth Berry Plastics Corp. of Evansville, Ind., which Apollo acquired in 2006 for $2.25 billion. In 2007, Apollo merged Berry with another of its acquisitions, film maker Covalence Specialty Material Corp. of Princeton, N.J. In February 2008, Berry acquired caps and closures maker Captive Plastics Inc. of Piscataway, N.J., for about $500 million, adding another plastics firm to Apollo’s portfolio.

After debt conversion, Apollo also recently became the largest shareholder of global polyolefins giant LyondellBasell Industries AF SCA, as it emerged from bankruptcy. Apollo owns about 25 percent of LyondellBasell’s stock.

Pactiv also was in the news earlier this year when retail giant Wal-Mart Stores Inc. said it would remove Hefty bags from its inventory, as part of an ambitious program to winnow brand assortment. Wal-Mart reversed course after consumers complained about lack of brand choices on store shelves.

Opinions among industry-watchers on the news that Apollo and Pactiv were in talks varied, with several analysts saying the time is ripe for more packaging consolidation.

“We have strengthening leverage, strengthening capital markets, and strong and resilient performance in the packaging sector. That’s really attracting capital into the sector,” Will Frame, managing director at Deloitte Corporate Finance LLC’s Chicago office, said in a May 17 telephone interview.

John Hart, co-leader of the plastics and packaging team at P$M Corporate Finance LLC in Southfield, Mich., said the size of the potential deal shows that available credit is returning to the marketplace, and that the overall mergers and acquisitions are heating up in 2010.

“From an investment banking standpoint, it’s pretty encouraging to see,” he said in a May 19 telephone interview.

In the wake of the Apollo story breaking, Standard & Poor’s placed Pactiv Corp. on CreditWatch with negative implications. According to S&P’s, as of March 31, Pactiv had $2.1 billion of debt, including $160 million borrowed under its revolving credit facility to help fund the recent $200 million acquisition of PWP Industries Inc. of Vernon, Calif., one of Pactiv’s competitors in the production of amorphous PET for food-service packaging.

“We expect to resolve the CreditWatch following a review of additional information related to the potential for a leveraged buyout,” S&P’s analyst Cynthia Werneth said in a May 17 news release.

Peter Mooney, president of Plastics Custom Research Services in Advance, N.C., said in a May 17 e-mail that Pactiv has been on a buying spree for the past five years — and like many industry-leading companies suffered for it during the recession: “Apparently they bit off more than they could chew, particularly with the industry-wide sales slump coming at them in 2009 while they tried to integrate these new companies, plants, products, etc.,” he said.

“In this particular case, it seems like [Apollo’s] motivation is to acquire Pactiv, add it to an existing company — Berry Plastics — and then create a plastic packaging powerhouse, and then do something with it; maybe eventually taking it public,” Ghansham Panjabi, an analyst at Robert W. Baird & Co. in Milwaukee said in a May 17 phone interview.

Panjabi figured that Pactiv eventually will sell for between $34 and $38 a share; that would value the company at as much as $5 billion based on the number of shares outstanding April 30. Panjabi has an outperform rating on the shares.

If the deal goes through, he said, there likely would be redundancies across the assets of both packaging companies. For example, through its merger with Covalence, which formerly was part of Tyco Plastics, Berry broadened its reach beyond rigid packaging into flexible packaging.

“Berry … has a brand called Ruffies on the waste bag side. Pactiv has of course Hefty and they’re starting a new private label [bag]. So they do have some overlap and they’re gong to have to figure out how to deal with that,” Panjabi said.

Hart agreed that Berry would be a likely fit for a merger with Pactiv. “These other parties at the table obviously drive the prices up for the shareholders,” he said. “A Berry-Pactiv combination, in the event that they end up doing that, would change the landscape of packaging.”

Pactiv ranked No. 1 in Plastics News’ most recent ranking of North American thermoformers, and 12th among North American film and sheet producers. with annual thermoforming sales of $1.93 billion and $597 million in film and sheet. Pactiv was born in 1999 when it was spun off from Tenneco Inc. It employs about 12,000.

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