SPAC-lash Part II (Blackstone Version)

Today Tom Hicks and his SPAC vehicle, Hicks Acquisition, announced plans to do the world’s largest reverse IPO. The target is Blackstone Group-backed Graham Packaging, a $2.5 billion-revenue plastic packaging maker. Once the formal agreement goes through (today’s announcement was pre-merger agreement), shareholders of the SPAC, which went public in September 2007, must vote in favor of the transaction.

Not voting, however, will be the holders of Graham Packaging’s $2.5 billion of debt, some of it leftover from Blackstone’s LBO of the company in 1998. And judging by the reaction of one of those bondholders on today’s conference call, that’s good news for Tom Hicks. His SVP Christina Vest had to issue a “no comment” during the Q&A session, when an apparent bondholder accused the group of trying to “screw” them.

The disgruntled bondholder (I didn’t catch his name) took issue with the fact that there’s no change of control in the company’s bonds and Graham Packaging’s backers don’t seem too eager to pay any of it down. The only concrete debt repayment is $150 million to Graham Packaging’s Term Loan B. Hicks paid lip service to possible deleveraging but also stressed that Graham Packaging’s public peers have been highly levered in the past, too. Before and after the transaction Graham Packaging will be operating with 5X leverage, which Vest called a comfortable level.

Since the playback isn’t yet available, I’ll have to paraphrase the interaction between Vest and the bondholder.

Bondholder: Why is there no change of control for debt holders?
Vest: The credit agreement has a provision for what is considered to be an IPO organization, which this is.
Bondholder: Is there a legal reason for not changing control?
Vest: This isn’t the venue to get into that much detail.
Bondholder: Yes it is. This is a key interest for major bondholders. “You’re trying to screw the bondholders!”
Vest: “We’ve given our response.”

Interestingly, Vest mentioned that Citigroup and Deutsche Bank advised on the deal, and that both of those banks served as debt providers in Blackstone’s initial buyout of Graham Packaging, proving that not everyone wants to get out of their commitments to the company. “Graham has an attractive capital structure that would be difficult to replicate in this market,” she said in response to a separate question on the topic.

As for the rest of the call, here are some highlights of the transaction:

  • The deal is valued at $3.2 billion.
  • Blackstone will retain 34% of the shares of Graham Packaging for at least two years.
  • Hicks will control 66% of the business.
  • Last year Graham Packaging had $2.5 billion in sales. It lost $206 million thanks in part to one-time costs. This year it is expecting $2.4 billion and an EBITDA of $450 million.
  • Growth strategies include entering adjacent product categories like bottles for ready-to-drink tea and enhanced water. Likewise, the company is looking to emerging countries as they convert from glass packaging to plastic.
  • The company negotiates to pass changes in resin prices to its customers in every contract.
  • The merger agreement will be signed within a day or two.
  • The company will trade at a 7.7X evaluation to EBITDA multiple.
  • Blackstone had no exits plans for the business, according to Chinh Chu, Senior Managing Director at The Blackstone Group.
  • Hicks approached Blackstone directly around 60 days ago.
  • Hicks looked at more than 100 potential targets.