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Hicks Seals $3.2B Plastics Packaging IPO
Hicks Acquisition and Blackstone began discussions two months ago without an auction process.
June 30, 2008
Hicks Acquisition Co., a Dallas special purpose acquisition company established by private equity financier Thomas Hicks, said Monday that it has reached an agreement to go public with Graham Packaging Holdings in a $3.2 billion transaction with The Blackstone Group, marking potentially the largest transaction to be executed between a blank check entity and industrial company.
The blank check company’s deal with Graham Packaging, a portfolio company of Blackstone, involves $350 million of cash that will be paid to shareholders along with 35 million common shares and 2.8 million warrants. It will include 121.5 million outstanding shares, and earn out units structured with shares that trigger at $13.75 a share and warrants exercisable at $10 each.
Thomas Hicks, founder and chairman of Hicks Acquisition, says Graham Packaging represents the premier asset in the plastic container space. “Under the leadership since December 2006 of a new management team headed by chairman and CEO Warren Knowlton and COO and CFO Mark Burgess, Graham Packaging has burnished its already-outstanding reputation as the technology and innovation leader in its industry’s high-value-added segment and significantly improved its operational and financial performance.”
During a conference call about the deal on Monday, Hicks said the SPAC had reached out to a number of prospective private equity groups in January when it was seeking acquisition opportunities. Two months ago, the blank check vehicle began having discussions with Blackstone executives about a transaction with Graham, which did not involve an auction process, according to Hicks.
Hicks Acquisition raised $552 million from its IPO in October 2007.
A York, Pa.-based plastics packaging company, Graham Packaging generated $2.5 billion in revenue last year from sales of rigid plastic containers to blue chip consumer products customers like PepsiCo, Coca-Cola, Group Danone, H.J. Heinz Co., Abbott Laboratories, Arizona Beverages Co., Clorox Products Manufacturing Co., Nestlé/Gerber and Anheuser-Busch, among others. The company, which recorded $2.4 billion in long-term debt as of its last quarterly regulatory filing, produced more than 20 billion transparent and other plastic container units in 2007 from 83 manufacturing plants spread between Europe, North America and South America.
“It has long standing relationships with blue chip global consumer product companies,” Hicks said in the conference call.
Graham Packaging’s business is organized in four segments: food and beverage, household, automotive lubricants and personal care/specialty. Its business from those operations is expected to generate more than $450 million of Ebitda in 2008 on projected sales of more than $2.4 billion, as compared with roughly $440 million of Ebitda in 2007.
“Graham is a company with very exciting growth potential,” said Chinh Chu, a senior managing director at Blackstone and a member of Graham Packaging’s board, who added that the firm hadn’t been seeking to realize liquidity on Graham through a sale or IPO prior to the transaction with Hicks.
Once its initial public offering has been completed, Hicks Acquisition and Graham will operate as Graham Packaging Co. It also intends to use proceeds from the transaction to repay $150 million of debt on a term loan.
Chu said the deal represented a very good partnership between Blackstone and Tom Hicks that will help continue to drive the company’s growth. Hicks Acquisition shareholders will own 66% of the company, while Blackstone will remain a shareholder for the next two years with a 35% ownership stake, making it the company’s largest institutional shareholder.
Blackstone’s involvement with Graham goes back to 1998, when it sponsored a recapitalization of the company.
Michael Tew, co-founder of SPAC Research Partners, said it’s too early to tell whether the initial public offering will be a strong one especially given the company’s growth prospects in light of increasing “input” or commodity costs for its resins and the energy required to produce its plastic products.
“We have contractual documentation that allows us to pass on the costs of resins,” said Graham's Burgess, adding that roughly 75% of the contracts allow energy costs to be passed along to customers.
A majority of the company’s top customers maintain have long-term contracts with Graham.
What is unique and positive about the structure of the IPO transaction is the inclusion of earn out units, according to Tew. “We’re hearing on the Street this is an emerging trend to motivate management to generate greater returns for shareholders over the long term,” he said, adding “that’s really something that makes the deal unique and certainly more palatable to fundamental investors.”
Knowlton and Burgess will remain in their current positions at Graham.
Citigroup bankers Scott Baird, Jason Cunningham and Ben Difabiois are providing financial advice to Hicks Acquisition, while Akin Gump Strauss Hauer & Feld is serving as its counsel.
Houlihan Lokey is acting as financial advisor to the independent directors of Hicks Acquisition, while Graham Packaging is receiving financial advice from Deutsche Bank Securities bankers Bob Kitts, Niall Cullinane, Ryan Drook and Avery Whidden and Blackstone Advisory Partners, whereas Simpson Thacher & Bartlett is providing it with counsel.
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