BREAKINGVIEWS-Fragile Bubble Wrap buyout: handle with care

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Nov 17 (Reuters Breakingviews) - The acquisition of Bubble Wrap maker Sealed Air SEE.N comes with a bright red "Fragile" sticker attached. Private equity firm CD&R is paying a hefty 41% premium to buy the packaging materials supplier for about $10 billion, including debt. Fixing the struggling company, especially with consumers increasingly rejecting plastic, will be a fresh challenge for the buyout industry's turnaround skills.

Environmental concerns are taking the fun out of popping Sealed Air's best-known product. Amazon.com AMZN.O, for example, is among those rethinking its shipping practices to use more easily recyclable alternatives. The shift has become more financially evident, too.

Revenue from the unit that houses Bubble Wrap was about $450 million in the third quarter, or about a 25% decline from the same span in 2022. Its food division has kept growing as paper is harder to substitute for shrink-wrapping and vacuum sealing, but not enough to compensate. Sealed Air's top line this year is expected to be down 6% from three years ago, according to estimates compiled by LSEG, with nearly 11% less operating profit.

These will be CD&R's problems next year, assuming Sealed Air doesn't find another buyer during its 30-day window to field alternative bids. The basic deal math looks uncompelling. Assume the buyout shop stuffs its target with 5 times as much debt as the EBITDA it generates, or about $5.5 billion, grows sales 3% annually and sustains the current profitability. On that basis, if it sells at the same valuation multiple it is paying, the internal rate of return would be less than 10% in five years, according to Breakingviews calculations.

Doubling the figure will involve heavy lifting. Food packaging already accounts for two-thirds of Sealed Air's revenue, up from about half three years ago, but the company has been slow to move beyond single-use plastic, which should be an opportunity alongside cost savings. Boost the EBITDA margin to 25% from 21%, and revenue growth to 5% a year, and CD&R would unbox a 20% annualized return.

The firm, like many of its private equity peers, prides itself on the ability to run businesses better. More than half the returns generated in buyouts derive from increasing revenue and roughly the same proportion from fetching a richer valuation multiple than was paid, a study by consultancy Bain found last year. Higher interest rates could make it harder to persuade investors to reprice the company later while backlashes against plastic threaten to squeeze performance. It's a big deal to handle with particular care.

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CONTEXT NEWS

Sealed Air, the maker of Bubble Wrap and other packaging materials, said on November 17 that it had agreed to sell itself to private equity firm CD&R for $10.3 billion, including debt.

Under terms of the deal, Sealed Air shareholders will receive $42.15 per share, a 41% premium to where the shares closed on August 14, the day before activist investment firm Ancora disclosed an ownership stake. Sealed Air has 30 days to solicit other offers.

Evercore is advising Sealed Air while BofA, BNP Paribas, Citi, Goldman Sachs, JPMorgan, Lazard, Mizuho, RBC, UBS and Wells Fargo are advising CD&R. The same group, excluding Lazard, has committed debt financing to the buyout firm.

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))