Hart assets on block as debt grows
Less than 10 years after building the world's largest packaging empire, Graeme Hart is taking advantage of record values for packaging assets by selling businesses worth at least US$US7.6 billion (NZ$8.9b) to reduce a towering US$18b debt pile.
Hart's Reynolds Group confirmed in the US on Monday that it had embarked on a strategic review of three of its businesses which account for around a third of total earnings.
These include Evergreen Packaging, which makes juice and milk cartons; the Closures business, which makes bottle tops and caps; and carton maker SIG Holdings, the second-largest drink carton maker after TetraPak.
"Both reviews may result in a decision to sell some or all of those businesses, although no decision has been made at this time to do so," Reynolds said in a filing to the US Securities and Exchange Commission.
Hart, 59, has a net worth of US$7b, according to Forbes. The National Business Review rich list valued him at NZ$6.4b last year.
Bankers say the sale of the fibre-based operations would enable Hart to take advantage of rising valuations for packaging assets while testing the waters for an initial public offering of his remaining plastic-based packaging businesses.
"The valuation cycle for packaging is at all-time highs. It's the best time in 10 years to sell," said one industry source.
"This may be a good time to divest some assets at premium multiples and pay down debt."
The announcement follows recent unconfirmed reports that Reynolds had hired Goldman Sachs to find buyers for SIG' US$20b spree.
Hart has splurged almost US$20b on a series of highly leveraged acquisitions over the past 10 years, including US$4.5b for US plastics maker Graham in 2011, US$6b for food service packager Pactiv in 2010, US$2.7b for Reynolds consumer packaging in 2008, $US500 million for Evergreen in 2006 and US$2.3b for SIG in 2007.
The privately held company makes a wide range of packaging, from beverage cartons and plastic bottles to kitchen wrap, bottle tops, rubbish bags and takeaway food containers.
Reynolds now has total revenues of US$13.9b in 2013, making it larger than Amcor and TetraPak.
But borrowings have ballooned to US$18.1b, or 6.2 times earnings before interest, tax depreciation and amortisation, and the company's annual finance costs of US$1.6b have undermined earnings and synergies from acquisitions.
The debt is split between bank loans and bonds, which are rated speculative or below investment grade by Standard & Poor's and Moody's.
Reynolds Group chief executive Tom Degnan and finance director Allen Hugli said last year that Hart wanted to reduce the group's leverage to 5.5 in the short term and five times earnings over time by selling non-core assets.
Only then would the company be in a position to test the market for an initial public offer, they said.
Market sources said Hart may be looking to reduce debt, or testing the market ahead of an IPO, for either the entire business or the remaining flexible and rigid plastic packaging units.
"Packaging multiples are pretty frothy at the moment, so it's probably not a bad time to be selling or IPOing," said one analyst, who declined to be named.
Global packaging assets are fetching between eight and 10 times EBITDA. The asset sales could raise between US$7.6b and US$9.5b. Evergreen earned US$247 million last year, Closures US$162m and SIG US$543m, while Pactiv, Graham and Reynolds earned US$1.7b combined, accounting for 64 per cent of group profits.
"I wonder if he's doing it to get a sum of the parts ...testing the market so he knows what the assets are worth," another source said. "These appear to be well-established cash-generating businesses, so there will be demand - it will just be a function of price."
Potential buyers of the fibre-based assets include private equity investors, who have been active in the packaging industry in the past, and trade players.
Amcor, which competes against SIG and Evergreen in beverage containers, declined to comment. Amcor is considered unlikely to be interested in the assets under review because it is focusing on flexible and rigid plastic packaging, and spun off its fibre-based packaging operations last year into a separately listed company, Orora.
Earlier this year Hart's Carter Holt Harvey sold its pulp, paper and packaging businesses to Japan's Oji Holdings for $1.04b.