In this installment of “Anatomy of a Deal,” we focus on a packaging manufacturer that had hit a rough patch before we were first introduced to its business. However, it had a plan for recovery and presented an investment opportunity that bank lenders were unlikely to pursue.
The Background
The lessee is a film and paper packaging manufacturer founded over 30 years ago with several national clients. The company produces packaging for well-known consumer products that demand special packaging—charcoal, flour, pet food, and the like. In recent years, the Company also added film and laminating printing capabilities, enabling the company to package everything from baby wipes to food products.
In 2017, the company had a tough year. It lost an important customer and revenues fell. This highlighted a major risk, the Company’s exposure to a client base that primarily submitted orders on an as-needed basis, rather than contracted revenue. During the same time period, the Company incurred a number of large, one-time costs: an investment in new equipment; considerable R&D costs devoted to a potential project for a new customer, which the company ultimately backed out of; and an environmental fine.
All of these factors made it difficult for a bank to finance the Company, but all could be remedied. When we first met with the company, it had already taken steps to rectify its issues. First, to stabilize sales, the company put more focus on securing longer term contracts and had already won multi-year deals with several well-known national consumer products brands. Second, the company refocused its strategy around higher-margin lines of business. The company had also improved operational efficiency, improving its financial performance.
In our financial analysis, we also considered the fact that the company has withstood several recessions, and its clients tend to supply nondiscretionary household items, which hold up in market downturns. At that point, the future we saw for the company was far brighter than the one told by a simple look at its recent financial history.
The Deal
Looking forward, we saw considerable opportunity with limited risk for the packaging manufacturer. While revenues fell for the company in 2017, they rose in 2018, and are projected to grow significantly as the company executes on its refocused strategy.
As a provider with our own capital, we had more flexibility to act than banks bound to underwriting constraints. We felt at ease with the company’s equipment – given our depth of experience with evaluating a wide variety of asset types. The company plans to add equipment to increase capacity. It also plans to buy machinery designed to improve environmental quality and lower the risk of fines. The equipment, all computerized, can also be upgraded in the coming years at a modest cost, increasing its useful life.
The deal highlights the fact that we are willing to accept a higher degree of perceived risk for deals that are well-secured by assets. In this case, the financing is collateralized by all existing machinery currently owned and new machinery to be acquired by the Company. Ultimately, the $10.5 million transaction was structured to recapitalize the company’s balance sheet and give liquidity for the Company’s future expansion.
