By Michael Oneal | Shares of Hefty-bag maker Pactiv Corp. shot up 21 percent in early
trading Monday on word that private-equity giant Apollo Management is in talks to buy the Lake Forest-based manufacturer, and
consolidate it with a packaging company Apollo owns in Indiana.
Neither Pactiv nor Apollo would comment on the talks, which were first reported in the Wall Street Journal. A source close to the situation confirmed that discussions between the two companies are underway, although no deal is imminent and obstacles remain to be overcome.
Pactiv, which was spun off from Lake Forest-based Tenneco Inc. in 1999, is best known for its flagship Hefty trash bag products, but actually gets two-thirds of its sales from providing food service containers to restaurant giants like McDonald’s Corp. and Starbucks Coffee Co.
With headquarters in Lake Forest, it has approximately 3,600 employees in Illinois working in 14 facilities, including eight manufacturing plants..
Analysts said New York-based Apollo, which is run by prominent distressed-asset investor Leon Black, is likely interested in Pactiv as a consolidation play. Apollo owns Indiana-based Berry Plastics Corp., a packaging company it acquired in 2006 for $2.25 billion, and has been building it through acquisition for the last couple of years. Last month, Apollo also bought CKE Restaurants Inc., the parent company of fast-food chains Carl’s Jr. and Hardee’s.
Ghansham Panjabi, an analyst with R.W. Baird & Co., said there are good synergies between Berry and Pactiv, with Berry making closures for plastic bottles, disposable packaging and Ruffies garbage bags. Berry, based in Evansville, is slightly bigger, he said, but Pactiv is more profitable. Both management teams are well regarded, he said, offering no obvious choice for which one would head a combined company.
Panjabi said a combination would accelerate Pactiv’s expansion into consumer plastic products and would help the company transition from its reliance on injection molding technology to thermoforming, which is a cheaper alternative.
Chief Executive Richard Wambold has run Pactiv since the spinoff. The company has been trading around 35 percent below its pre-recession highs, as 2009 sales dipped to $3.4 billion, from $3.6 billion the year earlier. Earnings, however, have been growing, and the company posted an 8 percent surge in first-quarter revenue.
Pactiv has $1.5 billion in debt, but a strong balance sheet and plenty of cash flow from both its consumer and food service businesses. Panjabi said the company throws off an average of around $400 million in cash a year, and could likely support five times that amount in debt to fund an acquisition.
Pactiv trades at around 13 times earnings. Analysts have said it is undervalued, partly because the dominant food-service side has slightly thinner margins, which gives investors pause relative to the other consumer packaging companies it is often compared to.
“It is the most inefficiently priced company in its space,” Panjabi said.
As a private company, such concerns wouldn’t make much of a difference, particularly since the company has fixed a problem with an underfunded pension plan that had been a legacy of the spin-off.
Pactiv shares, which closed Friday at $23.97 each, shot as high as $29.41 in morning trading on twice the normal volume. Panjabi said he expects an acquisition would probably be priced at less than $34 a share.