BERY - Berry Plastics Group

[kab60]

Anyone took a look at this Company?

I believe Turtle Creek is a major shareholder and there's a really good (one of the best I've read on SA) write up here: https://seekingalpha.com/article/4215354-berry-global-undervalued-packaging-business-50-plus-percent-upside (check it out via Outline.com if you don't have a subscription)

Basically, Berry Plastics Group is one of the biggest producers of plastic for - among other things - diapers.

It's a rollup story but one where there's actually a lot of tangible synergies, since the main material is resin, and Berrys scale means it can source resin cheaper than the competition.

It was beaten down in October (unfortunately I wasn't aware of the Company then) due to the perceived risk of increased resin costs. But that risk is largely overblown, IMO, since they pass the cost along to their customers with a bit of a lag (if resin prices increase dramatically it's a real risk, since plastic might be substituted).

Anyway, they have a terrific track record of doing m&a (almost 40 deals I believe) where synergies have often brought the multiple down from some 8-9 to 4-5 x ebitda so one benefit from tangible synergies as well as a possible multiple re-rating due to private > public as well as scale.

It's a really boring industry (which I like), it seems to manage well in a downturn (any of you guys quitting your diapers, when we hit a recession?), and they operate in a fragmented industry with very tangible benefits from scale. There's some leverage, but they're gusing out cash, and todays market cap of 6,3b compares to guidance of 670m FCF in 2019 (they always seem to beat their FCF guidance) or a 10,5 pct. FCFE yield.

They've spent a couple of years doing smaller deals and bringing leverage down after they did a big one ine 14-15, so I think this is a story where earnings are gonna jump once every few years if/when they find a large deal.

Private equity loves the space (Carlyle-backed Novolex bought Waddington Group from Newell Brands recently) and Advent International bought Faerch Plast (for some 13-14 x Ebitda I'm told).

I haven't pulled the trigger, but with a +30 pct. ROIC, fragmented and boring market I think it's starting to look cheap since they should have high returns on incremental capital employed.

Really not sure what I'm missing, anyone else had a look?

[WneverLOSE]

I took a look and see (after peeking at Turtle 13F  ), my understanding is that the market expects plastic use to go down.
The war on plastic is real and BERY point of view is that plastic products do so much good to the world by their functionality and since it is the most economical and environmental large scale solution plastic should still grow and be used, take a look at this talk by the CEO about how he sees plastics vs alternatives and how they try to educate the public :
https://www.youtube.com/watch?v=mReJkSsqMv4

I always underestimated the rate of growth of new technologies that caught on and turned out to be viable but my ability to forecast those in advance are non existent so I can't know if the fear is logical or not.

Companies are trying to switch to plastics alternatives or recyclable plastics in order to be healthy and green, How recyclable are the resins berry uses ? no Idea, maybe someone here can help with that, how viable are plastic alternatives ? No idea as well.

Edit :
Also their moat around purchasing scale could deteriorate if suppliers of resins consolidate as well and have more negotiating power against them (Walmart for example is able to bully small suppliers but this tactic doesn't work as well with coca cola).

Saying that I do see the potential of great returns, even if those fears of mine materialize at a slow rate (suppliers slowly consolidating and slow move towards recycled / alternatives).

[kab60]

I think your points are valid, but a quick Google search seems to suggest plastics use is still growing "nicely" (and I'd expect that to continue - knowing how slow politicians are to change things). BERY is organized in three different segments and delivered 3 pct. organic growth in their most recent Q. If new technologies are needed to recycle plastics, it might increase complexity/need for investments and as usual favor the bigger players I'd think.

Either way, I think the political risk is hard to handicap and probably not necessary to have a strong view on given the valuation. I think it's more a matter of whether or not their margins are somehow gonna contract and increased appetite among PE firms pushes valuation a lot higher than they've been historically (I think that risk is real, considering Advent paid 13-14 times EBITDA for Færch Plast), but at the same time it seems like the market is extremely fragmented. Would be nice to know how many meaningful acquisition targets are out there, but I haven't read anything about that in the few investment reports I've seen on BERY.

A bit from a Plastics lobby if you're really bored: https://cdn.ihs.com/www/pdf/Plastics-Polymers-Brochure.pdf

[kab60]

Interesting development. Apollo (PE fund, former Berry owner) is buying RPC in UK for some 4,3B USD. Berry has announced they might wanna do a counter bid (but they wanna do a due dilligence first). It would potentially be a hugely transformative deal.

[kab60]

Here we go. Berry buying RPC for 6,5b USD incl. debt. Including synergies they're paying some 7xev/ebitda (while they trade at roughly 9x). Historically they've been conservative on synergies, so I'd expect the price to go down meaningfully.

From a PE source of mine RPC seems to be a bit of a mess, so I hope (and expect) that they know what they're doing. Apollo, which used to own Berry - and are known to be bargain hunters - also tried to take over RPC, so at least two savy buyers have done meaningsful due dilligence. RPC shareholders aren't exactly celebrating over the price paid (not much of a premium) which suggest Berry might have gotten a good deal.

It could be quiet transformative as it increases Berrys ebitda 50 pct. It's all debt, so leverage will go up to 5x, but they throw off cash, so that should come down quickly so I'm not at all worried about that. Considering the current environment I'd expect them to get pretty great financing terms.

[Deepdive]

Kab,

Can you expand on the RPC is a bit of a mess commentary?  I think a few people on VIC have also mentioned that. 

[kab60]

I don't know too much about it. I just heard from a major PE player involved in Danish Færch Plast (now owned by Advent) that it's a very mixed bag of a lot of different companies not necessarily in the most attractive segments. Judging from the margins it doesn't exactly look like it's stellar run. Which - depending on how you slice it - might actually make it more attractive for Berry (RPC has 153 manufacturing locations which intuitively sounds like quiet a lot, so there might be much higher synergies down the road).

[BG2008]

Apparently, RPC buys resin from North America.  This should allow Berry to pass along the resin purchase savings which could be 1-2% of revenue. 

[kab60]

Good write up on VIC with some incremental and interesting points: https://www.valueinvestorsclub.com/idea/Berry_Global/9901425751

I'm long

[longlake95]

Just about to dig into the latest Q. Boy, this is getting whacked the last couple of days. Over reaction?
Trades at 10% FCF yield...