Warburg Pincus demonstrated its faith in the public markets, agreeing to invest in Wellman, Inc., a publicly traded manufacturer of polyester products, in a $125.4 million PIPE. The transaction is still subject to shareholder approval and also hinges on Wellman’s ability to obtain a new $175 million credit facility to replace its current $275 million facility, scheduled to mature in September.
Oliver Goldstein, a vice president at Warburg Pincus who has also been tapped to sit on Wellman’s board of directors, said, “We had been looking at the PET [chemical] segment for a while, and when we were contacted by Wellman’s [banking] agents, we responded pretty quickly.” Wellman hired J.P. Morgan Securities, Fleet Securities and Bear, Stearns & Co. as advisors for the transaction.
Under the terms of the agreement, Warburg Pincus invested $20 million in the form of a convertible subordinated note, which, upon shareholder approval, will be exchanged into preferred stock and warrants to purchase 1.25 million shares of Wellman common stock at an $11.25-per-share exercise price. Also, once the deal is approved the firm will invest another $105.4 million for roughly 11.1 million shares of preferred stock, of which 4.4 million shares can be converted into common stock, also at $11.25 a share. However, the conversion price can still be adjusted if the stock does not reach a specified performance level within four years. At press time, Wellman’s stock was trading at $11.38 a share, and in the last year, has seen lows of $9.20 a share and has been as high as $18.22 a share.
Robert Kyle, executive vice president at PlacementTracker, a private investment research firm, said this deal is distinct for two reasons, with its sheer size and the price protection component making this stand out from other PIPE deals. “This deal will probably be one of the larger PIPE deals this year… and the price protection is rare, especially in this day and age. It has received a lot of scrutiny from the press and shareholders,” Kyle stated, adding that the price protection looks like it will guarantee Warburg Pincus a return regardless of Wellman’s stock performance. He added, though, “This deal works out well for both [Warburg Pincus and Wellman]. It’ll help Wellman’s liquidity issues, but it’s tough to find that cash without giving up a pound of flesh.”
In all, Warburg Pincus’ investment will yield a roughly 30% stake in Wellman, according to Goldstein. The firm will also get two board seats, one of which has already been assumed by Goldstein. Wellman indicated it will use the cash infusion primarily to help pay down debt. Following the deal’s announcement, Standard & Poor’s revised its outlook on Wellman to stable from negative and affirmed its BB+’ corporate credit and preliminary senior unsecured debt ratings on the company.
Shrewsbury, N.J.-based Wellman manufactures and markets polyester products, including polyester fibers and polyethylene terephthalate (PET) packaging resins. The company also recycles PET plastics and uses a significant portion of the recycled raw materials in its manufacturing operations. On the same day Wellman announced the Warburg Pincus investment, the company also publicized its results for 2002, reporting $26.4 million in earnings from operations and $1.014 billion in sales from operations. In its release Wellman Chairman and CEO Tom Duff called 2002 a “disappointing” year, and noted that PET resin margins came in under expectations. Duff added that with increased capacity utilization in North America, he expects future margins and profitability to improve.
Goldstein echoed that sentiment, noting that his firm was attracted to the growth attributes of the PET market. “The PET plastics segment is expected to show very high growth, with projections ranging from 7% to 10%, as consumers shift to that type of plastic,” Goldstein said.
While the deal represents one of the larger pipe deals so far this quarter, it did not generate much interest on Wall Street. Buckingham Research, in a note to clients, commented, “On one hand, the substantial equity investment by a sophisticated investor could be viewed as positive. On the other hand, we did not view Wellman’s debt position as serious enough to require what in essence is a debt for equity swap. Assuming no dilution is involved, we’re neutral on the deal.”
Warburg Pincus’s transaction, once it is completed, would be the third-largest PIPE deal in 2003, behind $200 million-plus private investments in XM Satellite Radio Holdings and Phillips-Van Heusen.
Kyle notes, “The PIPE market is on pace to pretty much match the activity levels of last year. In 2002, the market slowed quite a bit from levels seen in 2001 and 2000.” Indeed, according to PlacementTracker, the total value of PIPE deals in 2002 slipped to $11.62 billion, down from $13.9 billion and $21.46 billion in 2001 and 2000, respectively. So far this year, 54 PIPE deals have closed, with an aggregate value of $1.1 billion. Kyle adds that Warburg Pincus is one of the largest and most active PIPE investors since 1995, with over $1 billion of investments spread out over thirty different deals.
Warburg used its $5.3 billion Warburg Pincus VIII fund for the investment. Goldstein said his firm typically holds onto its investments for four to seven years, and he doesn’t expect this latest investment to stray from that.