Raw materials used in the packaging industry don’t come cheap, and for the last year and a half, commodity prices have been on the rise. In addition to forestry products and chemicals, natural gas is but one of the key raw materials employed by packaging businesses-used to generate the power needed to transform wood pulp into paper products. And given the post-Hurricane Katrina price hikes of natural gas last year, it’s not difficult to imagine that some packaging companies took a financial hit.
Packaging Dynamics Corp. (Nasdaq:PKDY) is one such company that felt the price pinch. As a result, the company’s stock have been relatively illiquid, and for more than a year now, prospective buyers, including private equity firms, have been circling the Chicago-based producer of flexible packaging.
An agreement was finally reached at the close of February whereby the board of Packaging Dynamics approved an acquisition offer made by private equity firm Kohlberg & Co. for $14 per share, or $268 million before expenses. The deal includes the assumption or refinancing of the company’s $111 million of debt as of Dec. 31 2005, according to Packaging Dynamics Chairman and CEO Frank Tannura. The agreement represents a 17% premium to average closing price of the companies shares over the last 90 days.
“We had been approached by a number of others over the past 12 to 18 months…and [the board] ultimately concluded that this was a good transaction with good value for our shareholders.”
Even though Packaging Dynamics has been having trouble, the purchase price multiple, which works out to be 8.1x adjusted EBITDA, falls in the middle of the 7.5x to 9x EBITDA range that has defined packaging M&A deals for the last year or so, said one financial analyst. Kohlberg & Co. did not return phone calls.
“The question of why [sell] now revolves around a number of factors,” Tannura said. “First, the stock is very thinly traded… and we’re aware of the frustrations around the liquidity in the stock. But we did spend most of our time thinking about the valuation and the prospects of the business in the future, and the board came to a view that a transaction valued at over 8x EBITDA was a fair transaction given the prospects that the company has.”
The transaction is expected to be completed during the second quarter of 2006, at which point Packaging Dynamics will be merged with Thilmany LLC, a packaging operation acquired by Kohlberg & Co. last May that produces specialty packaging used for medical, consumer product and industrial applications. Thilmany currently has two businesses: Thilmany Papers, which includes two mills that create various paper products, and Thilmany Packaging, which converts said products into packaging.
Packaging Dynamics represents a third leg to the platform, producing food packaging products such as specialty bag, wrap and sheeted products for the restaurant, foodservice distribution, supermarket, and food processor segments. The combined company, to be known as Packaging Dynamics, will have annual sales of approximately $750 million.
Per terms of the deal, senior management of the two companies will play what could be compared to a game of musical chairs. Jack Rohrbach, Thilmany’s chairman, will become non-executive chairman of the combined company while Packaging Dynamics’s Tannura will become CEO. John Zuleger, Thilmany’s president and CEO, will become president and COO, while Pat Chambliss, Packaging Dynamics’s CFO, will have an expanded role as CFO of the combined company.
Mt. Kisco, N.Y.-based Kohlberg & Co. is currently investing from its vintage-2004 Kohlberg Investors V LP, which raised a total of $800 million, $750 million of which came from outside investors, according to the firm’s website. Tannura said that commitment letters have been obtained with respect to all necessary financing in connection with the Packaging Dynamics transaction.
Kohlberg & Co. typically makes investments in middle-market companies with enterprise values between $100 million and $500 million and seeks to provide equity capital of $30 million to $125 million. According to its website, the firm has generally used a lower degree of financial leverage than that employed by many other buyout firms, with a median debt-to-equity ratio of three-to-one, including a number of transactions with one-to-one debt-to-equity ratios.