Pactiv Corp. (PTV) shares jumped following a Wall Street Journal report claiming the company may be bought by private-equity firm Apollo Global Management. As the news spread, shares leapt 19% yesterday.
According to the report, Pactiv is discussing a leveraged buyout (LBO) with Apollo Global Management. As of yet, no details on the price of Pactiv have been released, and any possible deal is probably weeks away. The talks have not been confirmed by either party, and the source of the story declined to disclose his or her identity.
The report further stated that Pactiv has a market capitalization of $3.2 billion and carries $1.5 billion of debt. If materialized, the deal would be one of the largest LBOs in years.
Apollo is eyeing Pactiv with the intention to consolidate it with Indiana-based Berry Plastics, a manufacturer and marketer of plastic packaging products. Apollo acquired Berry in 2006 for $2.25 billion, and has since been building it through acquisitions.
Standard & Poor’s said that it has placed Pactiv Corp.’s BBB corporate credit rating on CreditWatch based on the negative implications of the reports of the potential buyout. If a leveraged buyout takes place, the agency will lower the ratings into the speculative grade, depending upon the proposed capital structure. If no transaction occurs, the agency will affirm its rating and remove it from CreditWatch.
Pactiv’s 1Q10 earnings performance was disappointing. Profit slumped 38% due to sluggish demand and high raw material costs, and revenue increased a meager 1% compared to the year-ago period. Demand for Pactiv’s products waned during the recession as consumers refrained from eating out at restaurants. Pactiv lowered its 2010 earnings per share outlook to $2.10–$2.30, stating its incapability to offset higher raw material costs with price increases until the second half of 2010.
Our Take
The talks between Pactiv and Apollo are further evidence of resurgence in leveraged buyouts, reflecting the stabilization of U.S. banks and their renewed ability to dispense loans to fund these deals.
Berry Plastics has annual sales of about $4 billion, while Pactiv generates about $3.5 billion. Berry and Pactiv would combine well, given their similar lines of business.
Pactiv’s cash from operations is around $400 million a year and total assets as of March 31, 2010 were $1.6 billion. Free cash flow for 2010 is anticipated to be in the range of $330 million to $350 million. This could support the interest payments arising from the high levels of debt due to the buyout.
Pactiv’s pension fund remains undercapitalized, but due to the cash infusion and buoyant equity markets, it has recovered to about 84% of its requirements. This clears a bottleneck in the acquisition process, especially since Pactiv remains undervalued. The stock closed at $28.44 on Monday, still 22% below its 2007 high of $36.36.
Pactiv strengths include: solid brand equity in its Consumer segment, market share-driven volume gains in Foodservice/Food Packaging, strong free cash flow generation, solid balance sheet and a robust product line. However, considering the volatile raw material prices, the ongoing pension exposure and the uncertainty regarding the buyout, we maintain a Neutral rating.
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 Foodservice/Food Packaging products. Pactiv’s Hefty® brand products include waste bags, slider storage bags, disposable tableware and disposable cookware.
Headquartered in New York City, Apollo Management L.P. is a private equity investment firm, which specializes in leveraged buyout transactions and purchases of distressed securities involving corporate restructuring, special situations and industry consolidations.
Read the full analyst report on “PTV”
Zacks Investment Research
