Hicks, Blackstone Forge Unusual SPAC Deal

Target: Graham Packaging Holdings

Price: $3.4 billion

Sponsor: Hicks Acquisition Co. I

Seller: The Blackstone Group

Financial Adviser: Sponsor: Citigroup; Seller: Deutsche Bank Securities and Blackstone Advisory Partners

Legal Counsel: Sponsor: Akin Gump Strauss Hauer & Feld LLP; Seller: Simpson Thacher & Bartlett

For The Blackstone Group and Tom Hicks, a SPAC was the best—and maybe only—option.

After a 10-year ownership, Blackstone Group had no viable exit in sight for Graham Packaging Holdings, a plastics packaging maker. The firm had failed to bring it public more than once, and in today’s market, with a mere two LBO-backed IPOs in the last quarter, such an exit appeared impossible.

Enter Tom Hicks. Last fall, the buyout pro tapped the public market to create a special purpose acquisition vehicle, or SPAC, after spending time on the sidelines following the collapse earlier this decade of Hicks, Muse, Tate & Furst, once a big player in the LBO world. Hicks Acquisition Co. I, a $552 million vehicle, evaluated more than 100 companies before agreeing Monday to purchase Graham Packaging in a $3.4 billion deal.

The deal’s close hinges on a majority of Hicks Acquisition’s shareholders voting in favor of the deal. A date for the vote had not been set at press time.

As part of the agreement, Blackstone Group will retain a 34 percent stake in Graham Packaging for at least two years; Hicks Acquisition will own 66 percent. But because the SPAC is owned by numerous different shareholders, the deal’s structure makes Blackstone Group the single largest stakeholder in the new entity. Consequently, the deal doesn’t trigger change-of-control provisions in Graham Packaging’s debt agreements.

That, in turn, preserves Graham Packaging’s highly leveraged capital structure at a time when a new debt agreement would likely impose onerous interest rates and less favorable covenants on the company’s $2.5 billion in debt. “Graham has an attractive capital structure that would be difficult to replicate in this market,” said Christina Vest, a senior vice president of Hicks Acquisition, in a conference call with analysts and reporters.

With the deal, Blackstone Group scores an exit, netting $350 million, which will be held in trust for two years. Meanwhile, Hicks Acquisition pulled off the biggest-ever industrial SPAC deal, made possible only by maintaining Graham Packaging’s existing debt arrangement.

The only unsatisfied customers may be Graham Packaging’s bondholders, who Vest said weren’t consulted in deal negotiations and who would have been entitled to redemption on the bonds in a change-of-control situation. During the conference call, Thomas Price of Wells Capital Management accused the deal’s architects of “trying to screw the bondholders” by keeping them out of negotiations. Hicks and Vest declined to respond to the accusation.

The breakdown of responsibilities between Blackstone Group and Hicks Acquisition has not yet been made public, a spokesperson for Hicks Acquisition told Buyouts. But both firms will have board representation and play a role in making key decisions, according to the spokesperson.

Blackstone Group purchased a majority stake in Graham Packaging in 1998. The business hit a rough patch in 2000 when prices for a key production ingredient rose, and a lackluster IPO market at the time forced Blackstone Group to withdraw a proposed share offering. The firm withdrew another public offering in 2004.

A year and a half ago, Blackstone Group brought in a new management team led by Chairman and Chief Operating Officer Warren Knowlton. The company generated sales of $2.5 billion in both 2006 and 2007 and expects to produce about $2.4 billion in revenue in 2008. In 2007, Graham Packaging lost $206 million, but that was driven mainly by an asset impairment charge and other one-time expenses that totaled $177 million. EBITDA for 2008 is expected to hit $450 million.

To increase the company’s earning potential, Graham Packaging intends to expand its presence in emerging markets, which are in the early stages of switching from glass to plastic packaging. Further, Graham Packaging seeks to offer products in adjacent, growing categories like ready-to-drink tea and enhanced water. The company’s customers already include many of the world’s largest consumer products companies such as Anheuser Busch, Procter & Gamble and Unilever.

The Blackstone Group isn’t the first LBO shop to take advantage of the spate of SPACs that have come to market in the last year. In June, Apollo Management sold Hughes Telematics Inc. to Polaris Acquisition Corp. for around $700 million. Earlier in 2008, Kirtland Capital Partners and Kohlberg & Co. each sold portfolio companies to SPACs. Likewise, Madison Dearborn Partners sold two of its companies to the same SPAC operators, Nathan Leight and Jason Weiss of Aldabra Acquisition and Aldabra Acquisition 2.