Sealed Air Seen as Takeover Target After Fumbling Deal: Real M&A

Sealed Air Corp. (SEE) is poised to turn into a takeover target after its biggest acquisition in more than a decade wiped out a third of its market value and left the maker of Bubble Wrap trading at a 64 percent discount to sales.

Sealed Air lost $1.4 billion in market capitalization since it said last June that it would buy Diversey Holdings Inc. for $2.9 billion to expand into cleaning and food-safety products. The Elmwood Park, New Jersey-based company is now the only U.S. packaging company trading below the value of both its revenue and net assets, and its remaining $2.7 billion in market value is less than the amount paid for Diversey as well as its total debt, according to data compiled by Bloomberg.

With the stock slumping after the Diversey deal and Sealed Air saying last month that it’s weighing options, the company could become vulnerable to a takeover, according to Stewart Capital. While it named a Dow Chemical Co. (DOW) executive to succeed its retiring chief executive officer, Sealed Air has a low valuation that, combined with its cash flow and the potential to improve margins, still could entice buyers willing to pay as much as $22 a share, said HighMark Capital Management Inc. That would be a 56 percent premium to yesterday’s closing price.

“When a company’s been mismanaged like this, and the stock price is as low as it is, I think vultures can circle whether it’s strategic or financial buyers,” Todd Lowenstein, a Los Angeles-based fund manager for HighMark Capital, which oversees $17.5 billion including Sealed Air shares, said in a telephone interview. “It’s got a good collection of assets that are under-earning their potential.”

Bubble Wrap

Ken Aurichio, a spokesman at Sealed Air, said the company doesn’t comment on speculation, when asked whether a sale may be among its strategic options and if it has been approached by potential suitors.

Founded in 1960, Sealed Air makes products including Bubble Wrap protective cushioning, Jiffy padded envelopes, Cryovac food pouches and sterile sealed packaging for medical supplies.

The company announced in June 2011 that it would pay $2.9 billion to buy Diversey, a maker of cleaning and sanitizing detergents, gels and foam, as well as electronic dispensers, for use in the food-service, health-care and lodging industries.

At an announced price tag of $4.3 billion including net debt, the deal valued Diversey at a multiple relative to earnings before interest, taxes, depreciation and amortization that was 53 percent higher than the average among comparable deals that year, according to data compiled by Bloomberg. CEO William Hickey defended the acquisition, saying at the time that while the rationale for combining the two companies wasn’t “intuitively obvious” there would be a “real opportunity.”

‘Dirt Cheap’

The purchase was Sealed Air’s biggest takeover since its $4.8 billion acquisition of the Cryovac food-packaging business from W.R. Grace & Co. in 1998.

Since the Diversey deal was announced, Sealed Air’s shares have tumbled 45 percent to $14.12 as of yesterday.

Sealed Air traded yesterday at 0.96 times the value of its net assets, the lowest price-book ratio among U.S. packaging makers and providers of other commercial services valued at more than $1 billion, according to data compiled by Bloomberg. It traded at 0.36 times sales, less than 92 percent of peers in the group, the data show.

“The market has punished Sealed Air for the acquisition,” Joshua Strauss, a Chicago-based co-manager of the Appleseed Fund (APPLX) at Pekin Singer Strauss, which oversees $900 million, said in a phone interview. “It has been horrendous. Now the stock is dirt cheap. I don’t believe there’s much downside left.”

Estimated Valuation

The firm has been adding to its position in Sealed Air, which accounts for more than 4.5 percent of the Appleseed Fund’s value, he said.

Strauss estimates Sealed Air is worth about $26 a share based on the sum of its parts. He reaches that valuation by applying a discount to the revenue multiple Reynolds Group Holdings Inc. paid two years ago for Pactiv LLC, one of Sealed Air’s competitors, and the multiple investors assign Ecolab Inc. (ECL), a Diversey peer.

The stock hasn’t closed that high since May 2011, data compiled by Bloomberg show.

Today, Sealed Air shares gained 6 percent to $14.96, the biggest advance in the Standard & Poor’s 500 Index.

After Sealed Air posted its third consecutive quarterly loss, Hickey said on an Aug. 2 earnings call that the company is weighing its options, without being more specific. Last week, it said Hickey will retire in March and named Dow executive Jerome Peribere to succeed him.

Potential Buyers

“When a company says it’s exploring strategic alternatives, it usually means, ‘Hey, we’re for sale at the right price,”’ Malcolm Polley, who oversees about $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a phone interview. “Although I’m sure they could say it means just about anything.”

Rivals such as Dow, the biggest U.S. chemical company, and Ecolab, the largest maker of cleaning chemicals for hotels and restaurants, could view the cheap valuation as an opportunity to bid for Sealed Air, Strauss said.

Nancy Lamb, a spokeswoman at Midland, Michigan-based Dow, said the company doesn’t comment on speculation related to acquisitions.

“Dow has been very clear in stating our priorities for uses of cash, which is to reward our shareholders, pay down debt, and invest prudently in strategic internal growth,” Lamb said in an e-mail.

Ecolab doesn’t comment on “possible business transactions,” Michael Monahan, a spokesman at Ecolab in St. Paul, Minnesota, said in an e-mail.

‘Better Use’

HighMark Capital’s Lowenstein said Sealed Air’s ability to generate cash and the potential to better manage the company’s assets and wring out higher profits could make it an attractive target.

On an annual basis, Sealed Air has generated cash from operations after deducting capital expenses every year since at least 1998, according to data compiled by Bloomberg. Analysts project the company will increase free cash flow by 38 percent this year to more than $369 million, estimates compiled by Bloomberg show.

The company earned less than a penny for each dollar of sales in the latest 12 months, compared with the industry’s median profit margin of 4.5 percent, according to data compiled by Bloomberg.

“Suitors would be interested in this collection of assets and potentially repositioning them for higher and better use,” Lowenstein said.

Sealed Air could also opt under its new CEO to stay independent and try to improve operations on its own, or sell off some assets, such as the Diversey business, without putting the whole company up for sale, Lowenstein said.

Debt Deterrent

While Sealed Air’s cash flow might attract private-equity firms, the company’s high debt levels would likely keep a buyout company from pursuing a takeover anytime soon, said Ghansham Panjabi, a Roseland, New Jersey-based analyst at Robert W. Baird & Co. Its total debt, at almost $5 billion, is more than three times what it was before the acquisition, data compiled by Bloomberg show.

“Is it a takeover candidate? Anything’s possible, but the reality is it already has a fair amount of debt,” Panjabi said in a phone interview. “Right now, I just think it has too much leverage.”

Even so, Stewart Capital’s Polley said there may be acquirers interested in the packaging business that could then sell or spin off the Diversey unit. In a split, some of the debt probably could be transferred to Diversey, he said.

“Sealed Air has traditionally been a good business,” Polley said. “Diversey ultimately became a distraction. Whenever you screw up, you can become a target.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Will Robinson in New York at wrobinson11@bloomberg.net.

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net.

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