September 29, 2009 6:47 pm
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Apollo Management has sunk at least USD 1bn into packaging companies Berry Plastics and Pliant Corp since 2005. As the global recession squeezed sector demand and commodity fluctuations whiplashed costs, the challenges for the private equity firm to make good on both investments grew steeper.
But Pliant’s imminent exit from bankruptcy sets the stage for a merger of the two portfolio companies and, if all goes well, an IPO that could land Apollo a turnaround windfall.
Apollo is scheduled to fully equitize around USD 138m of second lien bonds next month under the plastic film company’s plan of reorganization. Former owner JPMorgan Partners will turn over 75% of the company to Apollo while the remaining 25% will go to Berry, which Apollo bought in a 2006 LBO. Berry will contribute its Max Tech and Palle Tech brands to Pliant in exchange for the stake.
The transaction opens the door for a stock-for-stock merger between the companies that could yield top and bottom line synergies, four sources involved in Pliant’s bankruptcy told Debtwire.
If the merged entity can deliver on that potential by the time multiples in the packaging industry recover, Apollo stands a chance of making good. The PE shop still has USD 100m on the table in its Berry investment, and has sunk at least USD 400m into Pliant, according to public documents and two sellside analysts. Apollo recouped USD 500m of its investment in Berry in 2007 through a dividend payment.
Assuming that the 6x multiple typical to the packaging industry remains relevant, Berry is worth around USD 2.6bn against USD 3.3bn of debt based on its USD 480m LTM EBITDA. Without synergies or top-line growth, a combined entity would still have negative equity given Pliant’s estimated 2009 EBITDA of USD 111m and USD 340m of post-bankruptcy debt.
But if Berry hits its peak EBITDA potential of USD 550m and synergies bump EBITDA from Pliant’s operations to USD 170m, a very different picture emerges. Using the base case 6x multiple, enterprise value jumps to USD 4.3bn, implying USD 700m of equity value for an IPO.
However, given the four to five year life of Apollo’s investment, that would yield a very modest return on the estimated USD 500m it still has in the hole. If the firm can market an IPO at 7x it could raise as much as USD 1.4bn, creating a much more attractive proposition.
That pre-supposes an ability to truly leverage synergies that neither Berry nor Pliant have shown in the past. Berry is 17% short of the EBITDA targets it set itself when it acquired MAC Closures and Captive Plastics in December, 2007. Pliant has underperformed targets set in its 2006 bankruptcy plan by 67%.
Granted, those targets did not account for the steep decline in real demand caused by the US recession. And on the operating side, a merger would help consolidate 30% of the North American plastic film industry, establishing better pricing power for the company during downcycles when resin inputs spike, the analysts said.
Similarly, Apollo could also be angling for a tie up in the chemical sector. The firm is entrenched in the fulcrum security of the bankrupt Lyondell Chemical, whose assets could compliment existing Apollo portfolio companies Hexion Specialty Chemicals and Momentive Performance Materials.
A spokesperson for Apollo declined to comment, while messages left for Pliant and Berry officials were not returned.
Stretching for the payoff
Apollo’s packaging saga traces back to December 2005 when the firm bought Covalence, a then plastic film subsidiary of Tyco Intl. Covalence’s USD 975m buyout included a USD 200m equity slug from Apollo, said two sellside analysts who covered that deal.
Seven months later, Apollo contributed around USD 400m of equity to the USD 2.25bn purchase of Berry from then sponsors Goldman Sachs Capital Partners and JPMorgan Partners, the analysts said. Shortly thereafter, Apollo merged Covalence into Berry, and then recouped USD 500m through a dividend paid for with a new PIK loan, according to SEC filings.
The firm began its pursuit of Pliant at roughly the same time by buying into USD 250m of 11.125% second lien notes ahead of the company’s first bankruptcy in 2006. Once it became clear the second lien notes would be reinstated, Apollo sold out and bided its time.
When it became clear the packager was again struggling to service its reorganized debt load, Apollo went on a buying spree for the seconds once again, scooping up half of the second lien class at around 80 in January 2008, as reported.
Even with that stake in the fulcrum security, Apollo had to front another USD 293m to guarantee ownership of the company. Apollo shelled out USD 100m to pay down first lien bond holders led by Wayzata Investment Partners and committed to backstopping a USD 193m rights offering that will fund Pliant upon exit from Chapter 11.
Apollo’s Pliant shares will be held at its Investment Fund VI, the same fund that holds equity in Berry, making a tieup easier to execute. A Pliant/Berry marriage could add two to two and make five but it will add risk to Berry debt holders if Pliant’s USD 340m post-petition debt is shifted to a merged capital structure, said two Berry bond holders.
Pliant will exit bankruptcy with USD 250m of 11.5%first lien bonds and a USD 175m L+ 450bps revolver with USD 95m immediately drawn to pay back DIP borrowing. The 11.5%s have no call protection and Apollo could refinance the notes at a cheaper cost when a merger goes through, the sources added.
Berry’s USD 680m L+ 475 first lien FRN notes due 2015 traded at 92.75 Friday to yield 6.5%, up from 90.75 on 8 September, according to MarkitAxess. Its USD 525m 8.875% second lien notes due 2014 last traded at 95.5 to yield 10%, up from 88 on 3 September. The USD 221m 10.25% senior subordinated notes due 2016 last traded at 76 on 28 July.
Berry’s second lien and sub note indentures mandate that incremental first lien debt meets a pro-forma first lien leverage test of 4x. Adding Pliant’s USD 340 first lien debt load and its USD 100m-plus EBITDA generating assets would fit the carve-out, lowering Berry’s first lien to 3.75x from 4x, based on roughly USD 580m of EBITDA and USD 2.18bn of first lien debt, one of the sellsiders and the berry bond holders said.
Pro-forma leverage through the Berry seconds would also improve to around 5.2x from the current 5.5x under a debt consolidation. However, the layering impact coupled with both Pliant and Berry’s history of failing to deliver earnings and synergy forecasts could create downside, the sources added.
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