Pactiv is in talks to be acquired by Apollo. The packaging company is estimated to be valued at over $4 billion, and its sale would be one of the largest deals in the packaging sector in recent years. Georgia-Pacific and New Zealand’s Rank Group are also reported to be in the bidding. The packaging sector had been consolidating over a decade and the question is whether cost synergies would be enough to warrant a merger and longer-term holding period or it’s a game of oligopolistic pricing model?
Anyway, the potential winner could be Apollo because of the synergy benefit with its current portfolio company Berry Plastics (current sales ~$4.1 billion) and massive nature of consolidation to provide better economies of scale! In 2006, Apollo has Berry for $2.25 billion (~7.1x EBITDA), which have been built through 29 acquisitions, most recently Covalence Specialty Holdings and Pliant Corporation (for 7.6x EBITDA). Berry is the #1 producer of injection molded products for the packaging industry and the #2 film and sheet producer (yes, the combined company would be the largest user of polyethylene ~1.3 billion pounds annually!!). Commoditized plain vanilla packaging industry, Apollo wanted to double Berry’s revenue every four years, and it might be possible given its acquisition history and sector specific characteristics such as: participating companies' currently have high cash flows, historically low debt levels and are trading at relatively low valuations etc.
Apollo could potentially buy many other candidates in this sector such as Silgan that has a low debt level and stable cash flow, though one third of its shares are owned by its founders. The question is, couldn’t a private equity firm generate extra-ordinary profit for its investors, with longer-term holding period, if the organization has specialized knowledge about a particular sector and understand profit chain? How important is the true multiple expansions?
About Me
- Mo Hossain (@ Ennovance Capital)
- Mr. Hossain is a private equity investor, founded Ennovance Capital to buy and build niche chemical and healthcare related companies. (Please visit: www.ennovance.com)
1 comment:
To your last question about specialization:
In a way, this strategy of "long holding period" with specialization in a specific sector is akin to becoming a firm in that sector with two significant differences - the ability to move in an out in an easier manner than a firm can actually do, and to move between positions. Those two additional degrees of freedom do allow higher flexibility, and potentially, bigger profits than normal for that industry.
However, a key caveat exist. You want either an industry that is doing well, or an industry in which there will be significant internal activity, allowing the knowledgeable investor to capitalized on its "insider" knowledge. If an industry is not doing well, or is stagnant internally, than you can only do as well as the industry, or possibly if you pick your bets right, as the best firm(s) in that industry do.
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