According to a New York Post report, the attempt to acquire Pactiv Corp. (PTV) continues, with the latest entrant being Wichita Kansas-based privately held conglomerate Koch Industries. The news boosted Pactiv shares by 4% to $30.85, an all time high since the company had last seen the $30 territory on October 15, 2007.
Koch Industries is involved in various industries such as manufacturing, refining and distribution of petroleum, chemicals, energy, fiber, intermediates and polymers, minerals, fertilizers, pulp and paper, chemical technology equipment, finance and commodities trading.
Koch Industries owns paper and packaging company Georgia-Pacific, one of the world’s leading manufacturers and marketers of tissue, packaging, paper, pulp and building products. If the Pactiv acquisition goes through, the company will be integrated with Georgia-Pacific.
Earlier, in May 2010, rumors had surfaced that private-equity firm Apollo Global Management was eyeing Pactiv with the intention to consolidate it with the operations of Indiana-based Berry Plastics. Berry Plastic, acquired by Apollo in 2006 for $2.25 billion, is a manufacturer and marketer of plastic packaging products.
There have, however, been no disclosures on the Pactiv-Apollo front on acquisition rumors till date. According to the New York Post report, Koch Industries has sprung ahead of Apollo in the race.
Pactiv’s 1Q10 earnings performance was disappointing. Profit slumped 38% affected by sluggish demand and high raw material costs. Revenue increase was a disappointing 1% from the year-ago period. Demand for their packaging products waned during the recession as consumers refrained from eating out at restaurants.
The company lowered its 2010 earnings per share outlook to $2.10–$2.30, stating its inability to offset higher raw material costs with price increases until the second half of 2010.
Pactiv’s cash from operations is around $400 million a year with total assets of $1.6 billion as of March 31, 2010. Free cash flow for 2010 is anticipated to be in the range of $330 million to $350 million.
In spite of the lackluster performance in recent times, The company’s strengths include solid brand equity in its Consumer segment, market share-driven volume gains in Food Service/Food Packaging, strong free cash flow generation, solid balance sheet and a robust product line. Pactiv’s pension fund remains underfunded, but due to the cash infusion and buoyant equity markets, it has recovered to about 84% of its requirements. This clears a bottleneck in its acquisition process.
Even if the deals do not materialize, Pactiv is expected to deliver earnings growth in the back half of 2010 due to synergies associated with its acquisition of Prairie Packaging Inc., a leading manufacturer of disposable tableware products. Additional share buybacks, further strategic acquisitions and deleveraging of its balance sheet could buoy the shares. Its recent acquisition of PWP Industries is also expected to be accretive to earnings in 2010.
However, in view of the volatile raw material prices and the uncertainty regarding the buyout, we maintain “Neutral” on Pactiv.
Lake Forest, Illinois-based Pactiv Corporation engages in the manufacture and sale of consumer and foodservice/food packaging products in the United States and internationally. Pactiv operates through two segments: Consumer Products and Food Service/Food Packaging products.
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