Packaging: Hicks, Blackstone ready Graham Packaging IPO

Initial public offerings (IPOs) related to plastics have been scarce of late, with more companies made private than taken public, but packaging giant Graham (York, PA) hopes to make a splash later this year. Hicks Acquisition Company I Inc. (Dallas, TX), and private equity giant Blackstone proposed a deal to take the blowmolder of custom PET, PP, and HDPE containers public, naming the new company Graham Packaging Co. and eventually applying for a listing on the New York Stock Exchange. The $3.2 billion deal would maintain Blackstone as Graham’s largest owner for at least two years.

Graham, which was founded in 1972, specializes in custom packaging for four key markets: branded food and beverage; household; personal care/specialty; and automotive lubricants. The company’s 2007 net sales were $2.5 billion generated from the production of 20 billion containers at 83 processing plants in North America, Europe, and South America. The company is projecting 2008 sales “north” of $2.4 billion and an improvement over its net loss of $206 million in 2007, which included an impairment charge of $177 million.

In a conference call, Hicks founder, Thomas O. Hicks, said he considered more than 100 possible deals before settling on Graham. “I believe that Graham Packaging was the best acquisition we could have pursued for a number of reasons,” Hicks told analysts and investors, specifically citing its leading market positions, management, and potential growth opportunities.

Under terms of the deal, Hicks Acquisition’s existing public stockholders, along with Mr. Hicks, will own roughly 66% of Graham’s common shares after the transaction. Current Graham equity holders, a group led by Blackstone, will retain a majority share of the company in aggregate, with approximately 34% of the common shares outstanding. The existing management team, including Chairman and CEO Warren Knowlton and COO/CFO Mark Burgess, will continue to lead Graham. They were brought on in December 2006 as part of an effort to remake the business. Blackstone purchased Graham in 1998 in a $997 million deal. Graham itself greatly expanded business in 2004 with the purchase of specific plastics businesses from Owens-Illinois.

In the same call, Burgess addressed investor concerns regarding inflation in resin and energy prices, saying Graham has a contract structure that allows it to pass through increased costs. “We have a very, very effective mechanism that allows us to mitigate the risk of volatility in resin,” Burgess said. “As far as the energy factor of our costs, we continue to try to negotiate that as an element of our contracts and roughly 75% of our contracts have pass through.”

In order for the deal to be completed, a majority of shares issued in the initial public offering must be voted in favor of the transaction at the stockholders meeting. The parties expect the deal to close in the third quarter.

Hicks Acquisition was launched in October 2007 via an IPO that generated $552 million. Formed as a special purpose acquisition company (SPAC) to acquire or take control of businesses, Graham would be its first acquisition. Also known as “blank-check companies”, SPACs essentially use the proceeds from a public offering to buy a company. In a presentation posted as part of its 8-K filing with the Securities and Exchange Commission (SEC), Graham broke down its 2007 earnings thusly: food and beverage (61%); household products (20%); automotive lubricants (12%), and personal care/specialty (8%), with more than 90% of its sales coming in product categories where it holds the No. 1 market position. The company also said that some 80% of its products involve proprietary technologies.—[email protected]