Bear Stearns Thinks Inside the Box

The private-equity group has made John Henry Co. its beachhead in the packaging industry. Sexy? No Way. Solidly profitable? You bet

By Steve Rosenbush

In an era when business is driven by revolutionary changes in hot sectors such as communications and nanotechnology, the packaging industry might sound dull. But the private-equity group at investment giant Bear Stearns (BSC ) thinks the $100 billion market is ripe for investment.

Making its first move, Bear Stearns Merchant Banking has snapped up John Henry Co., a 93-year-old Lansing (Mich.) outfit, BusinessWeek Online has learned. The value of the deal wasn't disclosed, but it's estimated to be worth more than $100 million. Bear Stearns plans to use John Henry as a base on which to bolt more acquisitions, according to Phil Carpenter, Bear Stearns Merchant Banking Managing Director. After that, the plan is to sell off the business or take it public.

As Bear Stearns looks to more deals in the packaging business, it may consider poking around the media world. Sales of CDs and DVDs will continue to grow for some time, despite digital media's rising popularity. And even if all music sales move to digital downloads, someone will still need to produce boxes for all those music players.


  The packaging strategy is off to a significant start. John Henry has $150 million in revenue and more than 1,000 employees based at locations across the U.S. It makes and prints packaging for over-the-counter drugs, medical devices, horticultural products, and the note cards and markers used in the floral industry.

The business may sound stodgy, but that's part of the outfit's appeal. "One of the things we like about the packaging industry is its stability," Carpenter says. It has steady growth, and isn't subject to the abrupt swings of more volatile businesses.

The acquisition means Bear Stearns is well positioned to take advantage of growth in industries such as health care and media, but with less risk. The over-the-counter drug business is extremely competitive. Companies spend billions to develop new drugs, and success is contingent upon regulators, rivals, and consumers. Prices for drugs tend to fall as generic versions hit the market. The biggest part of John Henry's business is in health care. It manufactures and prints the drug packaging and the inserts that explain how medications should be used, the ingredients, the risks, and other crucial information.


  Regardless of how far profit margins in the drug industry may fall, rivals in that sector will always need packaging for their products. Companies such as John Henry profit in much the same way that arms dealers do in war: It doesn't really matter to them which side wins the battle as long as they can supply a broad range of customers.

And John Henry faces a limited amount of competition in the health-care packaging market. The federal government regulates the boxes, containers, and printed material that drug companies use. The containers need to be tamper-resistant and secure, and the printed material needs to be accurate and complete. Low-end producers of commodity boxes aren't drawn to the regulated market.

"This isn't the sort of packaging that's likely to be outsourced to another country. Most packaging for the U.S. drug industry is produced in the U.S.," Carpenter says.


  Health-care packaging isn't going to grow as fast as the next Google (GOOG ). But the revenue stream is predictable and secure, making it a good fit for private-equity firms. The steady stream of cash means the buyer can use the company as collateral to raise more money and make more acquisitions.

That's why private-equity firms, like Bear Stearns, are often drawn to middle-market companies in old lines of business, such as auto parts and tools. While stock market investors often focus on the faddish and new, many private investors like propositions that are reliable, dull -- and show a profit at the end of the year.

Rosenbush is a senior writer for BusinessWeek Online in New York

Edited by Beth Belton

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