Avgol in talks on merger with Blackstone’s Polymer Group

Tie-up would create a powerful company in North America and combine Polymer’s strong presence in Latin America with Avgol’s solid position in Russia and China.

By Yoram Gabison
Avgol Industries and private equity fund Blackstone are in preliminary talks that could merge the Israeli company with U.S.-based Polymer Group Inc., Avgol says.

Avgol makes nonwoven fabrics for disposable diapers and feminine hygiene products. A tie-up would create a powerful company in North America and combine Polymer’s strong presence in Latin America with Avgol’s solid position in Russia and China.

The talks apparently began during the first half of last year, shortly after Blackstone’s $389 million acquisition of Polymer, which competes with Avgol in nonwoven fabrics. Polymer’s 2010 operating profit reached $49 million on turnover of $1.1 billion.

Polymer offers a broad range of products such as nonwovens for medical and industrial uses; these generate 36% of the company’s revenues. The firm also enjoys a 28% market share in Latin America, accounting for 28% of its turnover.

Avgol, for its part, offers long-term supply contracts to the world’s two largest producers of disposable diapers and pull-ups for babies: Procter & Gamble, with a 32% global market share, and Kimberly-Clark, with a 25% share. These contracts contribute 43% and 19% of Avgol’s revenues, respectively.

Avgol is 23.7% owned by Israel Petrochemical Enterprises, which in turn is controlled by David Federman, Alex Passal and Jacob Gottenstein.

Avgol’s controlling owners also include Shuki Goldwasser (23.3% ), Leumi Partners (11.5% ), Avgol CEO Achai Bonneh (5.2% ) and Abraham Zilberfeld (2.2% ). The company is trading at a market value of NIS 885 million, reflecting an enterprise-value-to-Ebitda ratio (EV/Ebitda ) of 7.5.

A deal would see Petrochemicals exercise its option to buy a 20.8% Avgol stake from Goldwasser, a company founder, Bonneh and Zilberfeld at a dividend-adjusted strike price of NIS 2.06 per share. This is about 30% below the company’s trading price and would generate a profit of around NIS 50 million for Petrochemicals and raise its Avgol stake to 44.5%.

Meanwhile, Leumi Partners could be expected to exercise its option to buy an 8.3% Avgol stake at NIS 3.25 per share, raising its stake to 19.8%.

A stock swap would follow, with Polymer acquiring all Avgol shares held by the controlling group in exchange for cash and shares, accompanied by a Polymer tender to buy all publicly-held Avgol shares.

Petrochemicals has been busy trying to shore up its liquidity. The company needs NIS 324 million in 2012 and another NIS 539 million in 2013 to meet its liabilities to bondholders and banks, and to cover administrative expenses. It has only NIS 180 million in its kitty.

But the company’s main source of funds, dividends from its 30% stake in Oil Refineries Ltd., has gone dry until it completes a project to build a hydrocracking unit to produce clean fuels, probably in the middle of this year. Also, for a renewed dividend flow, Oil Refineries must meet covenants on the loans it received from banks to finance the project. Petrochemicals controls Oil Refineries with Israel Corporation, which holds a 37% stake.

Petrochemicals caught a break last month when leverage fund Bereshit agreed to give it a NIS 120 million bridge loan at 7.5%. Idan Ofer, controlling owner of Israel Corporation, also expressed his readiness to assist Petrochemicals.

The main problem, however, hasn’t been solved: Petrochemicals bought its Oil Refineries stake at a very high price and financed it with NIS 2.5 billion in bonds and bank loans, which has become an oppressive burden.

Petrochemicals doesn’t intend to sell its stake in the refinery company, and it will have to tackle NIS 658 million in principal and interest payments in 2014 and 2015. So Avgol will probably need to be sold even if the Oil Refineries dividend stream is quickly restored.

Source:  www.haaretz.com

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