Bloomberg News

Blackstone Turns Graham IPO Flop Into Lucrative Bids: Real M&A

June 15, 2011

June 15 (Bloomberg) -- Blackstone Group LP may finally get the payday for Graham Packaging Co. that it was denied last year as New Zealand’s richest man drives up the acquisition price.

Billionaire Graeme Hart offered to buy Graham, the plastic- container maker controlled by Blackstone, for $25 a share this week, topping Silgan Holdings Inc.’s original April agreement. After Graham climbed $1.28 above Hart’s proposal, the company’s valuation is now approaching the 9.21 times earnings before interest, taxes, depreciation and amortization that investors rejected in its initial public offering in February 2010.

While Hart’s bid is already the most expensive for any takeover of a U.S. plastic-container maker in nine years, arbitragers are betting that the winner will have to pay even more for a company with $2.8 billion in debt, the most in the industry, according to data compiled by Bloomberg. The world’s largest private equity firm, which chopped the size of the York, Pennsylvania-based company’s initial offering by more than half last year, may now sell Graham at more than double the IPO price and exit an investment that it’s owned for more than a decade.

“Blackstone did not get the price they wanted in the IPO,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion. “The stock has certainly acted like it could be a bidding war. That does provide Blackstone with the full value from their investment, and probably the best value they’re going to be able to get.”

Highest Multiple

Christine Anderson, a spokeswoman for New York-based Blackstone, declined to comment. Jeff Grossman, a spokesman for Graham, and Robert Lewis of Silgan did not return telephone calls requesting comment.

Reynolds Group Holdings Ltd., the aluminum foil producer owned by Hart’s Rank Group Ltd., offered to pay $4.3 billion including net debt, or 8.96 times its Ebitda in the past 12 months, according to data compiled by Bloomberg. That’s the highest multiple paid for an acquisition of a publicly traded U.S. company in the paper and plastic container industry since DuPont Canada Inc. paid 9.61 times Ebitda for Liqui-Box Corp. in 2002, the data show.

Joseph Doyle, a spokesman for Reynolds, didn’t return a phone call seeking comment.

Hart, 56, is trying to get a hold of Graham’s container business, which includes Procter & Gamble Co.’s Gain detergent, H.J. Heinz Co.’s ketchup, Coco-Cola Co.’s Minute Maid juice and Limited Brands Inc.’s Victoria’s Secret perfume.

Bidding War

Graham’s board yesterday said Hart’s bid was superior to an agreement with Stamford, Connecticut-based Silgan, which has the right to make a counter offer through June 16.

Silgan, which sells metal cans and closures to some of the same customers that use Graham’s plastic food and beverage containers, agreed on April 13 to pay 0.402 shares and $4.75 in cash for each Graham share owned. The $4 billion offer including net debt valued Graham at 8.31 times Ebitda, according to data compiled by Bloomberg.

“Blackstone’s going to end up with more money,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “They’re basically trying to engineer a better price. They couldn’t get it from their IPO, so a bidding war is appearing.”

Graham shares gained 20 percent in the last two days after saying it received a $25-a-share bid from an unnamed suitor, disclosed yesterday to be Reynolds. The stock closed at $26.28 yesterday, 5.1 percent above the bid, signaling that traders who profit from mergers and acquisitions are betting on a higher offer.

Higher Bid

The spread indicates a takeover price of $27 to $28 a share, with Silgan matching at $25 and Reynolds countering again, according to Bill Kavaler, a special situations analyst at Oscar Gruss & Son Inc. in New York.

“Arbs seem to think there will be a higher bid, but it won’t be too much higher,” said Kimberly Noland, a debt analyst at Gimme Credit LLC in Shelter Island, New York. “This has probably been a pretty good deal” for Blackstone, she said.

Graham fell 1.5 percent to $25.89 today, and Blackstone declined 2.5 percent to $16.59.

Blackstone was forced to cut Graham’s IPO in half in February 2010, reducing the price and dropping its portion of the sale. It was at least the fourth attempt by Blackstone to sell the company since completing the acquisition in 1998, data compiled by Bloomberg show.

Graham’s shares sold for $10 each, less than its original range of $14 to $16 apiece. The initial amount of stock offered at the $15 midpoint price would have given Graham an enterprise value, or the sum of its equity and debt minus cash, of $3.09 billion, or 9.21 times trailing 12-month Ebitda.

‘Bit of Vindication’

“They couldn’t get their IPO done at a good price,” said Craig Effron, co-founder of New York-based Scoggin Capital Management LP, which owns 1.1 million shares of Graham Packaging. “Now all of a sudden two buyers want to buy it at a very good price. There’s a little bit of vindication.”

Existing shareholders prior to the IPO, including Blackstone, paid an average of $7.30 a share for their stake in Graham, according to a February 2010 regulatory filing. The private-equity firm still owns 40.3 million Graham shares, or a 61 percent stake worth $1.06 billion based on yesterday’s closing price, according to data compiled by Bloomberg.

Effron said he bought more Graham shares this week at $25.75, adding that there’s an 80 percent chance that Silgan matches or tops Hart’s offer.

The winning bid would need to be at least $26.84 a share to reach the Ebitda multiple of 9.21 initially sought in the IPO, data compiled by Bloomberg show.

Hart’s Wealth

Hart’s wealth was estimated at $5.5 billion in March by Forbes magazine, ranking him at No. 185 in the world with six others and No. 1 in New Zealand. Since quitting most of his food businesses in 2006, Hart has embarked on an acquisition spree in packaging, including the purchase of Pactiv Corp., the maker of Hefty trash bags, for $4.5 billion plus net debt in November.

In the last two days, Silgan slipped 6.1 percent to $40.53. Graham closed yesterday 25 percent higher than Silgan’s offer that was worth $21.04 a share, the biggest gap among pending U.S. takeovers, according to data compiled by Bloomberg. Silgan fell 2.5 percent to $39.52 today.

While Silgan can afford to pay $30 a share, the company likely won’t raise the bid more than “a little bit” because it’s “never overpaid or chased something,” said Christopher Manuel, an analyst at KeyBanc Capital Markets Inc. in Cleveland.

Silgan, with $1.4 billion in total debt, already has too much debt to finance an all-cash acquisition like Reynolds, said Solaris’s Ghriskey.

“The market has changed a lot since Graham went public,” Ghriskey said. “Silgan certainly could come in and match. Reynolds might increase their bid at that point, and we might very well be in a bidding war.”

--With assistance from Daniel Hauck in Tokyo, Jason Kelly in New York and Jack Kaskey in Houston. Editors: Sarah Rabil, Michael Tsang.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Danielle Kucera in New York at dkucera6@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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