Packaging Perspectives

Transcription

1 Packaging Perspectives Summer 2008 FEATURE REPORT 2008: Mid-Year Review CHART 1 By William J. Hornell Managing Director Global M&A Activity in the Packaging Industry $15,000 $15,006 $11,390 $12,000 $ in m illion s What a difference a year makes. Last year at this time, there was little discussion about a credit crunch, sub-prime mortgages or collateralized loan obligations. Today these terms dominate financial headlines, and they are having significant repercussions in the stock market, the interest rate environment and the merger and acquisition (M&A) marketplace. $9,000 $6,000 $3,000 In the first six months of 2008, overall U.S. M&A deal volume dropped by 42% versus the same period in A good portion of that drop was due to a remarkable 85% drop in U.S. private equity deal volume during the same time period. The days of easy credit that turbo-charged the large private equity firms last year are certainly gone for now. Today, the commercial and investment banks that provided the rocket fuel are struggling to shrink their balance sheets and improve their capital positions. $0 First Half 2007 First Half 2008 Source: Capital IQ, Mesirow Financial. The packaging M&A marketplace was not immune to these larger forces. Chart 1 (above) compares global packaging M&A volume between the first halves of 2007 and Consistent with the broader economy, packaging deal volume fell 24% in the first half of The drop would have been more dramatic if not for International Paper s announced $6 billion acquisition of Weyerhaeuser s containerboard, packaging and recycling business. Continued on page 3 IN THIS ISSUE Feature Report...1 NOTABLE PACKAGING DEALS Notable Packaging Deals...1 Market uncertainty in 2008 has not hindered the completion of several large paper and packaging deals throughout the first half of the year. International Paper s purchase of Weyerhaeuser s containerboard, packaging and recycling business, RockTenn s acquisition of Southern Container, and Hicks Acquisition Company s purchase of Graham Packaging Holdings are three high profile examples of how well-capitalized buyers remain willing to pay a fair price for the right target. These three deals are profiled in this issue of Packaging Perspectives. Featured Mesirow Financial Deals...2 Recent Deal Activity...4 The Drivers of Packaging Industry Consolidation...5 Net Debt / LTM EBITDA Multiples North Clark Street Chicago, Illinois Continued on page 6

2 2 Summer 2008 FEATURED MESIROW FINANCIAL DEALS The Sale of Rex Corporation to Cenveo, Inc. Rex Corporation has has been acquired by by Sell-side Advisor Mesirow Financial, Inc. acted as exclusive financial advisor to Rex Corporation ( Rex or the "Company"), in its sale to Cenveo, Inc. (NYSE:CVO) ( Cenveo ). Rex, based in Jacksonville, FL, is one of the largest independent manufacturers of premium and high-quality packaging solutions. The Company serves several markets including pharmaceutical & healthcare, cosmetics, personal care, tobacco, food and beverage, apparel and confectionery, among others. Headquartered in Stamford, CT, Cenveo provides print and visual communications, including commercial prints, envelopes, labels, packaging and business documents. Cadmus Whitehall, a division of Cenveo, is a full-service print manufacturer that produces folding cartons and high-quality promotional print collateral for companies in the technology, healthcare, financial, tobacco and apparel industries. Rex marks Mesirow Financial s fifth folding carton transaction in the past three years. Prior notable transactions include the following: - Sale of Innovative Folding Carton Company to Multi Packaging Solutions - Sale of Hamilton Paper Box Holding Corporation to Rosmar Litho Inc. - Sale of Keller Crescent Company to Clondalkin Group - Sale of Creative Press, Inc. to New Jersey Packaging, Inc., a subsidiary of Menasha Corporation The Sale of Innovative Folding Carton Company to Multi Packaging Solutions, Inc. Innovative Folding Carton Company, Inc. a a portfolio company of of has has been acquired by by a a portfolio company of of Sell-side Advisor Mesirow Financial, Inc. acted as exclusive financial advisor to Innovative Folding Carton Company, Inc. ( Innovative ), a portfolio company of ICV Capital Partners, LLC and 21st Century Group, LLC, in its sale to Multi Packaging Solutions, Inc. ( MPS ), a portfolio company of BSMB. Innovative, based in South Plainfield, NJ, is a specialty printing and packaging company that serves the healthcare and cosmetic markets. Innovative is cgmp certified and features offset, flexographic and digital printing technologies as well as a full range of finishing equipment. MPS provides specialty print-based packaging products to the pharmaceutical, multi-media and consumer markets. Product offerings from MPS include folding cartons, labels, inserts/outserts, security tags, blister cards, jewel case slip sheets, instruction manuals, pixie tags and brochures. Innovative marks Mesirow Financial s fourth pharmaceutical/healthcare packaging transaction in the past three years. Prior notable transactions include the following: - Sale of Keller Crescent to Clondalkin Group - Sales of Rx Label Technology, a portfolio company of Pfingsten Partners and Hilco Equity, to Cenveo Inc. - Sale of Creative Press, Inc. to New Jersey Packaging, Inc., a subsidiary of Menasha Corporation

3 Summer Mid-Year Review continued from page 1 There was also a significant drop in private equity-backed packaging transactions. Chart 2 (right) compares the mix between private equity and strategic acquirers during the first halves of 2007 and Last year s private equity volume included The Blackstone Group s $3.3 billion acquisition of Catalent Pharma Solutions and Apollo Group s $1 billion combination of Berry Plastics and Covalence. Conversely, there wasn t a single private equity-backed packaging transaction that exceeded $1 billion in the first half of Middle Market Remains Active Interestingly enough, there continues to be a significant level of private equity-backed packaging transactions in the middle market. These deals simply were never large enough to access the high risk capital available from hedge funds and the high yield marketplace. Thus, the middle market funds, while affected by the credit crunch, are able to fund transactions through traditional capital sources. As a result, private equitybacked companies, like Clondalkin, Ampac, Tharco, Multi- Packaging Solutions Group and Rosmar Litho, continue to acquire businesses in consumer and industrial packaging. Not surprisingly, with larger private equity buyers hamstrung, valuations have come down. Chart 3 (right) compares the median enterprise value to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) multiples for packaging transactions between the first halves of 2007 and The outlook for the rest of 2008 is similar to the first half. Overall volumes will be down, led by a sharp drop in large, private equity-backed transactions. However, Mesirow Financial still expects strategic and middle market private equity buyers to remain active. CHART 2 Packaging M&A Activity Strategic vs. Financial First Half 2007 First Half 2008 Strategic Financial Strategic Financial 44% 56% 57% 43% Source: Capital IQ, Mesirow Financial. CHART 3 Packaging Transactions Median Enterprise Value / EBITDA Multiples EV / EBITDA 9.0x 8.0x 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 8.1x Source: Capital IQ, Mesirow Financial. 7.1x 1st Half st Half 2008

4 4 Summer 2008 MESIROW FINANCIAL RECENT DEAL ACTIVITY The following deal announcements demonstrate Mesirow Financial s recent deal activity across multiple market segments: has acquired the packaging business of a division of Hamilton Paper Box Holding Corp. a portfolio company of has been acquired by has been acquired by a portfolio company of Buy-side Advisor Sell-side Advisor Sell-side Advisor Rex Corporation Innovative Folding Carton Company, Inc. a a portfolio company of of has has been acquired by by has has been acquired by by a a portfolio company of of Sell-side Advisor Sell-side Advisor

5 By Louis W. Mitchell Managing Director Summer The Drivers of Packaging Industry Consolidation Despite the current credit market and overall challenging economic environment, packaging consolidators remain acquisitive and willing to pay a fair price for the right company. Large industry players, while cognizant of recent macroeconomic pressures, look towards merger and acquisition (M&A) transactions to help counteract these forces. Companies view acquisition opportunities as a means of complementing organic growth in what is a maturing industry. Industry experts view this trend as one of the primary drivers of packaging M&A activity over the past few years. Packaging manufacturers are facing a confluence of events that have resulted in margin pressure. Some of the more prominent drivers include: Customer consolidation High costs for raw materials and fuel Vendor Consolidation Customer globalization As a result, packaging companies are seeking strategic acquisitions resulting in operating synergies, such as reduced overhead and lower purchasing costs. In addition to the cost synergies realized through the right acquisition, packaging companies are expanding their product offering to include multiple substrates and one-stop solutions. Packaging companies are taking these steps to satisfy an increasingly demanding customer base. While some M&A transactions have become more difficult to finance due to the current credit market, the appetite for M&A among packaging companies remains strong. Even though current economic conditions may persist, present consolidation drivers will continue to fuel M&A activity. Need for Product Differentiation Customer Globalization Supplier Consolidation Consolidation Drivers Customer and Vendor Consolidation Raw Materials Price Volatility Maturing Growth

6 6 Summer 2008 Notable Packaging Deals continued from page 1 International Paper Co. Purchases Weyerhaeuser s Containerboard, Packaging and Recycling Business Weyerhaeuser s Containerboard, Packaging and Recycling Business ( Weyerhaeuser ) manufactures boxes and packaging products and recycles used packaging and paper. The transaction included nine linerboard mills, 76 U.S. and Mexico box plants, and more than 30 specialty packaging, kraft bag and recycling operations. International Paper Co. ( International Paper ) is a global producer of paper and packaging products with five operating segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution and Forest Products. The company is headquartered in Memphis, Tennessee and has operations in 20 countries. Purchase Price $6.0 billion Unadjusted EBITDA Multiple 9.0x (1) Adjusted EBITDA Multiple 6.9x (2) Strategic Rationale The acquisition of Weyerhaeuser s containerboard, packaging and recycling business by International Paper creates the world s largest containerboard producer with capacity of 11 million tons or 28% of North American market share. International Paper has been active in growing its complete line of paper and packaging business and services. Given Weyerhaeuser s strong business profile, new machines and large converting operations, the acquisition has proven to be a complementary and highly synergistic addition to International Paper. International Paper estimates that it will also recognize tax savings of $1.4 billion. Rock-Tenn Company Acquires Southern Container Corp. Southern Container Corp. ( Southern Container ) manufactures corrugated boxes and products for the food, beverage, cosmetic and pharmaceutical industries. The company also offers preprinted products and services, pointof-purchase (POP) displays and customized packaging. Southern Container operates one of the lowest cost recycled containerboard mills in North America. Included in the purchase were eight integrated corrugated box plants, two sheet plants, and four high impact graphics printing facilities. Rock-Tenn Company ( Rock-Tenn ) operates four business segments. The company s Packaging Products unit manufactures folding cartons; the Paperboard segment produces paperboard for manufacturers of paperboard products; the Merchandising Displays group manufactures POP displays and provides contract services and packaging products; and its Corrugated Packaging group manufactures corrugated packaging and sheet stock. Purchase Price $933 million Unadjusted EBITDA Multiple 6.9x (1) Adjusted Pro Forma EBITDA Multiple 5.8x (3) Strategic Rationale The acquisition of Southern Container further exemplifies Rock-Tenn s strategic initiative to improve its business by expanding its manufacturing capabilities and geographic footprint. The company s strategy is to create an industry leader in each of its operating segments by acquiring companies with a vast product portfolio and a desirable customer base, much like its 2005 acquisition of Gulf States, a bleached board and packaging manufacturer. The Southern Container acquisition expands Rock-Tenn s corrugated and merchandising display segments and makes Rock-Tenn the eighth largest containerboard manufacturer in North America. Southern Container s efficient facilities have provided complementary products and services to Rock-Tenn s growing operation. In addition, Rock- Tenn estimates that it will recognize tax savings of approximately $150 million. Hicks Acquisition Company I Purchases Graham Packaging Holdings from The Blackstone Group (Announced June 30, 2008 / Pending) Graham Packaging Holdings ( Graham ) designs, manufactures and sells plastic packaging products. Graham specializes in custom blowmolded plastic containers for branded foods and beverages, personal care and specialty products, household products and chemical-based products. The Blackstone Group took control of the company through a leveraged recapitalization in 1998 and has since doubled its size with the acquisition of the plastics unit of Owens-Illinois in Hicks Acquisition Company I ( Hicks ) is the Special Purpose Acquisition Company (SPAC) of leveraged buyout veteran Mr. Thomas O. Hicks. SPACs are investment vehicles whose sole mission is to find and acquire a company in a set period of time. Mr. Hicks SPAC went public in September 2007, and the shareholders must now vote in favor of the transaction. Purchase Price $3.2 billion (1) EBITDA estimated based on recent Wall Street research reports. (2) Based on International Paper company presentations. Adjustment reflects anticipated tax savings achieved through the transaction. (3) Based on Rock-Tenn company presentations. Adjustment reflects anticipated tax savings achieved through the transaction. Continued on page 7

7 Summer Notable Packaging Deals continued from page 6 EBITDA Multiple 7.7x (1) Strategic Rationale Over the last few years, SPACs have become increasingly common investment vehicles, and with this transaction, Hicks Acquisition Company announced the world s largest reverse IPO. According to the terms of the agreement in principle, Hicks current shareholders will own approximately 66 percent of the newly public company, while Blackstone and other current Graham equity holders will own the remainder. The deal allows Blackstone to make a partial exit of an investment that it has held for over a decade. Blackstone agreed to retain its remaining portion of the shares for at least two years. Mr. Hicks said that his firm considered more than a hundred possible transactions before selecting Graham. Net Debt / LTM EBITDA Multiples Net Debt (1) / LTM EBITDA COMPANY 03/31/ /31/2001 Cenveo, Inc. 5.5x 5.2x Cascades, Inc. 5.4x 3.1x Smurfit-Stone Container, Corp. 4.8x 4.6x Rock-Tenn Company 4.0x 2.5x International Paper Company (2) 3.2x 4.4x MeadWestvaco Corporation 2.5x 4.0x Pactiv Corporation 2.4x 2.1x Amcor, Ltd. 2.5x 2.2x Bemis Co. Incorporated 1.6x 1.5x CCL Industries, Inc. 1.6x 2.7x Sonoco Products Company 1.5x 2.2x Packaging Corporation of America 1.1x 1.8x (1) Total debt less cash and cash equivalents. (2) Pro-forma for the acquisition of Weyerhaeuser assets. MEDIAN 2.5x 2.6x Source: SEC Filings, Company Presentations and Capital IQ. Above is a sampling of the Net Debt / EBITDA multiples for select global packaging companies as of March 31, 2008 and December 31, Over the last six years, many of these companies including International Paper, Pactiv, Cenveo and Rock Tenn, among others, have been highly acquisitive. In many cases, these companies have used debt to finance transactions, yet the median Net Debt to EBITDA ratio has decreased moderately from 2.6x as of December 31, 2001 to 2.5x as of March 31, While there are some outliers, most companies presented have moderate levels of net debt, allowing for continued acquisitions in the future. CONTACT US To learn more about our packaging expertise on a confidential basis, contact: William J. Hornell Managing Director Direct bhornell@mesirowfinancial.com Louis W. Mitchell Managing Director Direct lmitchell@mesirowfinancial.com Rocky Pontikes Director Direct rpontikes@mesirowfinancial.com Rick Weil Director Direct raweil@mesirowfinancial.com Eileen M. Kirkwood Vice President Direct ekirkwood@mesirowfinancial.com

8 321 North Clark Street, Chicago, Illinois MESIROW FINANCIAL CORPORATE INVESTMENT BANKING Our Corporate Investment Banking professionals focus exclusively on the middle-market, serving financial sponsors and corporate clients. We have a national presence, with global reach giving us strong cross-border capabilities. We help private and public companies in meeting their financial objectives by offering a complete range of services including: merger advisory; exclusive sales and divestitures; buy-side advisory; 363 sales/restructurings; fairness/solvency opinions; special committee representation; and private placements. Our Corporate Investment Banking group continues to be a leader in assisting packaging companies with merger and acquisition transactions. Our firm has completed more than 65 packaging merger and acquisition transactions in recent years. MESIROW FINANCIAL Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals and was named one of Chicago s Best Places to Work by Crain s Chicago Business in For more information about Mesirow Financial, visit its Web site at Mesirow Financial Corporate Investment Banking services are provided by Mesirow Financial, Inc., member NYSE and SIPC. The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc. 2008, Mesirow Financial Holdings, Inc. All rights reserved. Statistical information contained herein has been obtained from sources believed to be reliable but such accuracy cannot be guaranteed. IRS Circular 230 Notice: To the extent that this communication or any attachment concerns tax matters, it is not intended to be used, and cannot be used by a taxpayer, for the purpose of avoiding any penalties that may be imposed by law.