Posted: December 01, 2011
The price is right, so let’s make a deal
Cheap money, undervalued businesses fuel middle-market M&As
By Stephen Titus
It's hard to find any good news about the economy these days - unless you talk to someone in the mergers and acquisitions marketplace.
Capital, from banks and private equity firms, is out there looking for a home, and strong companies with the ability to borrow can get hold of this relatively cheap money for acquiring struggling businesses that are looking for a leg up. Of course, this is a simplified look at things, and there are always barriers to making mergers happen, but there are winners and losers in every market and the people who make their living putting these deals together say the environment is right for winners to win big.
"The middle market is as good as it's been in more than three years. It's close to the heyday of the mid 2000s," said Adam Agron, co-chair of the corporate group at the Colorado law firm of Brownstein Hyatt Farber Schreck. "Because of the economy, purchase prices are low so the environment for acquisitions is good. The cost of money is what's been a catalyst to getting deals done in an otherwise shaky environment. Because of the uncertain regulatory environment, if money wasn't so cheap we'd be in trouble."
Agron considers deals ranging from $50 million to $500 million as the middle of the market, and he is referring to the uncertain regulatory environment banks are facing when it comes to lending money. This holds true whether you're buying a ski condo or the entire resort. Federal regulators require banks to keep more cash on hand to back up loans than they did a few years ago, but the calculations and rules for determining the amounts are complex and can vary with the type of loans.
This uncertainty, at best, makes deals take longer and at worst scuttles some. But according to Agron and others, Colorado's middle-of-the-road market is very strong and private sources of funds are increasingly available from investors looking for opportunities outside of the publicly traded stock markets.
Reasons for mergers vary, of course. Big investment capital firms like Blackstone Group or Colorado-based Gallagher Industries look for undervalued companies to snatch up and either flip for a profit or combine with another company to create a sum greater than the parts. This is the case with Liquid Container LP and Graham Packaging, a merger helped along by Brownstein Hyatt Farber Schreck.
Both companies make plastic bottles for things like food, motor oil and cosmetics, among other things; it's a near certainty that you have a Graham bottle in your refrigerator or shower right now. Graham, controlled by Blackstone Group, focused on higher-end custom bottles while Liquid Container produced a less expensive line of stock shapes and sizes, making for a valuable synergy if the two companies could be combined.
"Transactions aren't the ultimate goal but the strategic goal," said Kevin Cudney, senior shareholder at Brownstein Hyatt Farber Schreck and co-chair of the corporate business department. Cudney worked with Graham Packaging on this deal. "From a strategic point of view, Graham felt the need to bulk up its product line and saw that this was an industry that was consolidating."
Getting there involved some serious financial calisthenics. Early in 2010, while part of Blackstone's portfolio, Graham concluded a public offering of about 190 million shares of stock, with Blackstone as the majority shareholder. Shortly after this, Graham began negotiating to acquire Liquid Container and tendered a public debt offering of more than $300 million to help finance the purchase. In September 2010, the deal concluded for $568 million, creating a plastic container-making powerhouse, and Blackstone was ready to look for a buyer.
This time it's Silgan Holdings, a major manufacturer of metal packaging (cans, foil pans, etc.) with many of the same customers as Graham. The match looks perfect and would open new doors with Silgan's already impressive customer base of major food and beverage producers like Pepsi, Coca Cola, Procter & Gamble, General Mills, Heinz, Kraft Foods, Johnson & Johnson and the list goes on. Silgan's bid of $4.1 billion in cash and stock, or about $21 per share, would cover Graham's $2.8 billion in debt and leave Blackstone investors with some Silgan stock to spread around to its investors.
But Cudney points out that in most public company acquisitions, the target - in this case Graham and its newly acquired Liquid Container - is allowed to solicit bids for some period of time.
"They did that and ended up with a higher price," he said.
New Zealand billionaire Graeme Hart and his holding company, Reynolds Group Holdings, swept in offering $25.50 per share - all in cash - or about $4.48 billion. At the same time he also landed Chicago-based Pactiv Corp., the largest manufacturer of food-service packaging with names like Starbucks and McDonalds as its biggest clients, for about $5 billion. His powerful collection of packaging operations makes it one of the biggest in the world. Industry watchers say Hart's next move is probably to reorganize the collection of businesses to take advantage of shared technologies and management, then sell it for a profit.
"Private equity firms move into industries that are intrinsically undervalued or in need of consolidation and create something of greater value," Cudney said, using the Graham Packaging deal as an example. "They'll fill out a product line and do what they do best ... that's use their money to turn $10 into $20."
Others in the industry back this up, saying that savvy investors know returns from private equity investments are some of the most lucrative and are looking for opportunities. Agron noted that many equity funds have an eight- to 10-year lifespan from formation to exit and many formed in 2007 and 2008 are running out of funds. This is leading them to sell assets to other funds with the same investors, creating a "churning" phenomenon.
"There's been some pushback from investors who say ‘Where is the value created here?'" Agron said.
This is driving some investors away from the larger equity firms like Blackstone to look for more sector-specific investments.
"The bottom line is the investors are so savvy that as long as they have success, they'll continue to raise capital because their returns far outstrip what you can see in the public market, so they'll continue to have interest from high-performing funds," Agron said.
At the other end of the spectrum, in terms of the financial value and aggressive wrangling that went into the deal, is Vail Resorts' purchase of Northstar at Tahoe. Vail CEO Robert Katz said they had been talking with the previous owners for several years before finally closing out a deal with Booth Creek Resort Properties LLC at the beginning of the 2010 ski season. Purchased for $63 million in cash, Northstar, which is about the size of Vail's 3,000-acre Back Bowls, is a smaller upscale destination that will bulk up Vail's presence in the spectacular Tahoe valley.
"This is a resort we had an interest in," Katz said. "We've had a relationship with the previous owners for some time and it just came up in conversation."
It's been nine years since Vail Resorts purchased Heavenly at Lake Tahoe, one of the largest resorts in the Tahoe area. The addition of Northstar gave Vail another $67 million in gross revenue for its first fiscal year with the resort, which ended July 31 according to the company's year-end report, and gave skiers another reason to invest in season passes, which also saw sales increases of nearly 10 percent over the pervious year. The report also points out that skier visits and real estate sales were up over the previous year at all of Vail Resorts' ski areas. While Vail relies on real estate sales for a significant portion of its revenue, the development opportunities at Northstar are owned by Colorado-based East West Partners.
Coincidentally, East West CEO Harry Frampton was president of Vail Associates from 1982 to 1986, prior to its public offering and expansion outside of Colorado. Vail Resorts is a strategic, if not financial, partner with East West on many projects in Vail-owned resorts. In 1994, Vail merged its real estate brokerage arm with Slifer, Smith & Frampton, the largest real estate brokerage in the Vail Valley where Frampton is a founder and principal.
"We don't do real estate development for development's sake, we do it to improve the quality of the resort," Katz said. "I think (East West Partners) were pleased with us coming in because they know our focus is on quality."
Graham Packaging and Vail Resorts have nothing in common, but their investment and acquisition goals have everything in common: Add value by acquiring complementary companies. While limited space makes it impossible to explore all the deals that have taken place in Colorado over the last year, it's clear that the opportunities for mergers are excellent, with investors, banks and many companies both weak and strong in the mood for consolidation.