Saint-Gobain’s Sale of Jars Unit Still Faces Acid Test

Cie. de Saint-Gobain SA’s disposal of a U.S. glass-bottle business for $1.7 billion, cheered by the company as a “milestone,” leaves the French homebuilding products maker with European assets it may struggle to sell.

The sale of the U.S. unit to packaging company Ardagh Group SA topped the valuation of the Verallia bottle business in a failed 2011 share sale attempt, Saint-Gobain said yesterday. The remaining assets, mostly based in Europe and maybe worth twice as much as the U.S. unit, will be sold on the stock market or to investors, the company said.

“Saint-Gobain has sold the easiest bit,” said Arnaud Palliez, an analyst at Raymond James in Paris. The rest, which may be worth 2.75 billion euros ($3.7 billion) to 2.9 billion euros, “doesn’t offer very dynamic growth prospects” and “will be tougher to sell” because the only likely buyers are private-equity funds, he said, adding that an initial public offering could also be an option.

The European deal is key for Saint-Gobain Chief Executive Officer Pierre-Andre de Chalendar as he exits packaging to focus Europe’s biggest supplier of building materials on its other three main sectors. The proceeds will allow Saint-Gobain, based in Courbevoie near Paris, to pursue targets in Asia and other emerging markets and strengthen its balance sheet, he said yesterday, adding that the sale of the U.S. bottle business is a “new milestone.”

Photographer: Fabrice Dimier/Bloomberg

The European deal is key for Saint-Gobain Chief Executive Officer Pierre-Andre de Chalendar as he exits packaging to focus Europe’s biggest supplier of building materials on its other three main sectors. Close

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Photographer: Fabrice Dimier/Bloomberg

The European deal is key for Saint-Gobain Chief Executive Officer Pierre-Andre de Chalendar as he exits packaging to focus Europe’s biggest supplier of building materials on its other three main sectors.

Rising Debt

The remaining part of Verallia, with production facilities in France, Spain, Italy and Germany, Poland, Ukraine and North Africa, had annual sales of more than 2.5 billion euros and Ebitda of more than 500 million euros in 2011.

Fetching a good price for the European Verallia assets will be important as analysts including Caroline Brugere, a Paris- based analyst at Credit Agricole, said the proceeds need to be used to pay down debt. Saint-Gobain’s net debt amounted to 9.8 billion euros at the end of the first half in 2012, up 8.5 percent from a year earlier.

“At this stage, we assume that 100 percent of the disposals will be used for debt reduction,” Brugere said. “We expect management to prioritize the maintenance of the mid-BBB rating over acquisitions.”

Moody’s Investors Service and Standard & Poor’s, which rate Saint-Gobain at Baa2 and BBB respectively, have said they may downgrade the French company whose earnings have been hurt by Europe’s construction slump in 2012.

U.S. Recovery

In July, Saint-Gobain had decided to put new acquisitions on hold, and to reduce capital expenditure and financial investments by 200 million euros and 350 million euros, respectively, in the second half.

The deal with Ardagh, which has clients such as brewer Heineken NV (HEIA) and cosmetics maker L’Oreal SA (OR), comes amid signs of recovery in retail spending in the U.S. A housing-market rebound, higher stock prices and an improving job market are helping sustain consumer spending, which accounts for about 70 percent of the economy.

The transaction values Verallia North America, the second- largest glass container maker in the U.S. with estimated revenue of $1.62 billion in 2012, at 6.5 times 2012 earnings before interest, taxes, depreciation and amortization, the company said yesterday.

In 2011, Saint-Gobain tried to sell 40 percent of Verallia in an initial public offering, only to be prevented by a market slump amid the sovereign debt crisis. The 2011 IPO would have valued Verallia between 5.8 times and 6.4 times Ebitda, and transactions in the industry have been made at between 5.5 times and six times earnings, according to de Chalendar.

Several Options

“This transaction is positive news, especially at this current multiple,” said Sven Edelfelt, an analyst at Bryan, Garnier & Co in Paris.

Saint-Gobain shares dropped 0.5 percent to 31.68 euros in Paris as of 9:19 a.m., giving the company a market value of 16.8 billion euros. The stock gained 8.6 percent in 2012, while the CAC 40, France’s leading stock-market index, rose 15 percent.

Saint-Gobain now wants to grow in energy-efficiency products, as well as consolidate its positions in building materials distribution, de Chalendar said yesterday.

For the remaining Verallia assets, all options are open, including an IPO at some point, though European markets don’t allow for a share sale “today,” the CEO said. Owens-Illinois Inc. (OI), the world’s largest maker of glass bottles and jars ahead of Verallia, is unlikely to be interested in Verallia’s European assets, according to de Chalendar.

Debt Crisis

Emmanuel Soupre, a fund manager who helps manage $4 billion at Neuflize Private Assets in Paris, including shares in Saint- Gobain, said the company needs to act carefully until the economy picks up again.

“An all-out acquisition strategy might leave the company in a difficult situation if the environment were to remain tough longer than expected,” said Soupre. “By reinforcing its equity, the company may reduce the cost of debt.”

The European debt crisis may also prompt Saint-Gobain to review its 2015 growth targets, said Phil Roseberg, a London- based analyst at Sanford C. Bernstein.

In December 2010, de Chalendar said revenue would reach about 55 billion euros in 2015, with the assumption that its glass packaging unit would be sold by then to fund acquisitions in faster growing areas such as energy-savings construction products. He banked on a combination of 6 percent organic sales growth per year, and 3 percent to 4 percent of additional revenue per year stemming from acquisitions.

Target Update

An update regarding Saint-Gobain’s 2015 goals may come when annual earnings are released next month, de Chalendar said yesterday.

“The 2015 targets today are unachievable. They were announced in 2010 with a different picture of the world, but recovery has been much slower since then,” Sanford C. Bernstein’s Roseberg said. “I don’t think investors are holding the company to these numbers, and certainly would not like the company to buy its way to growth through its bad acquisition habits of before.”

To contact the reporter on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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