Sunday, August 29, 2010
We have previously discussed how risk arbitrageurs are not interested in speculating on what companies will be acquired. The majority of portfolio positions are comprised with definitive agreements. Included in the "announced transactions" bucket are unsolicited offers where the (eventual) deal price is unknown, and even situations where initial terms have not even been disclosed (GENZ). The idea here is that we're not searching for takeover candidates. One of the downsides to companies with no agreed deal is that the timeline can be inauspicious. For example, Novell Inc (NOVL) received an offer in early March and has yet to announce a deal. This post will discuss Pactiv Corp (PTV), a company for which deal speculation began three months before a merger was announced. PTV produces consumer and food packaging products, including disposable plastics, foam, pressed paperboard, aluminum, and molded fiber. The company is well known for its Hefty brand.
The Wall Street Journal reported on May 17 that buyout firm Apollo was in talks to acquire PTV. The logic behind a deal with Apollo centered on Berry Plastics Corp, a packaging company that Apollo acquired in 2006 for $2.25 billion. Apollo then merged Berry with another portfolio company, Covalence Specialty Material Corp. In 2008, Berry acquired Captive Plastics Inc for about half a billion dollars. An announced transaction with PTV was said to be weeks away. PTV's share price increased 19% for the day on this news to close at $28.44/share.
A few days later, the WSJ said that New Zealand-based Rank Group and Georgia-Pacific entered the bidding process. In late July, the New York Post said that Koch Industries was considering a bid for PTV. The auction process was expected to be finalized by the middle of August. (You'll notice we include the publication when we mention a news report. This is because each media outlet has its own credibility factor. If the WSJ is told by sources that a company is shopping itself, while Joe's Newswire says the same company is not, are the contrasting stories weighed equally? Not on our desk. We have our preferred publications, and we even go so far as to consider the individual reporters).
On August 17, PTV announced the definitive agreement to be acquired by Rank Group subsidiary Reynolds Group Holdings for $33.25/share. The $6 billion deal represents a 39% premium to PTV's May 14 closing price, the last trading day prior to published reports regarding a transaction. The premium is 7% to PTV's August 16 close (lower, obviously, because of the expectations of a deal). The takeout price values PTV at 7.5x EBITDA. Reynolds obtained committed financing from Credit Suisse, HSBC, and Australia New Zealand Bank.
Now, what can we learn about Rank Group? It turns out, the conglomerate's driving force is its principal owner, Graeme Hart. The 55-year old New Zealand native ranks as #144 on the Forbes list with a net worth of $5.3 billion. The former tow truck driver and high school dropout later returned to school and earned an MBA from the University of Otago in 1987. Using Rank Group as the vehicle for essentially a one-man buyout shop, Hart began to acquire companies, turn them around, and sell them for a profit. Lest you think our money man is driven only by the buck, in early 2007, after spotting a burning yacht off Waiheke Island, Hart rescued three people and a dog from the conflagration. The yacht soon sank, and Hart was touted for his selflessness.
The spread is 3.3% as of the August 26 close. That's fairly wide for a definitive agreement with no glaring risks. Capturing that spread hinges on regulatory approval. We talk about the HSR (US antitrust) process often, and it is the driving force in the PTV deal. The combined company would have some concentration in the garbage bags and storage bags segments. Market share information for these areas is scarce, but it is safe to say that the HSR waiting period will not receive early termination. A second request is quite possible. Reynolds Group even mentioned a second request on a conference call, but they were adamant that any concerns regulators have could be resolved. Even when it's obvious a second request is expected, spreads widen when they are disclosed. In lieu of a second request, there could be one or more re-filings.
The way to approach this deal is to put on a portion of your desired position now, and see what happens on the HSR front. Say you want it to be 5% of your portfolio. Take it up to 4% now, and if it widens on a second request, put on the remaining 1%. If it tightens on news of a smooth review, still put on your remaining 1%. At least you had 80% of your position established at a wider level. Can't win 'em all. Stay tuned for more merger arbitrage analysis in the near future.