Private Equity Eyes Pactiv: What is a Fair Price?

Shares of Hefty trash bag maker Pactiv Corp (PTV) jumped more than 20% on Monday morning following a Wall Street Journal report claiming the company is in talks with Apollo Global Management.  Apollo already has assets in the plastics industry through Berry Plastics (acquired in 2006), and some have speculated that the two companies would be merged together were a deal made.  As of yet, no details on the price of Pactiv have been released and any possible deal is probably weeks away, but coming into the day they claimed a market cap of $3.2 billion and debt of $1.5 billion.

Although the talks have not been confirmed by either party and the source of the story declined to be named, it has been reported widely in the financial media and the stock has spiked as a result.  At Ockham, we think the valuation of PTV was attractive coming into the day, and we have held an Undervalued stance on Pactiv for most of the last year.  The stock has traded below its historically normal levels of price-to-cash earnings and price-to-sales during this time.  In general, we believe that the market will tend to revert to more normal valuations over the course of time.  According to our methodology, PTV would be worth about $33 per share based on the current fundamentals when compared to historical valuations.

For instance, PTV has historically traded for a price-to-cash earnings level of 10.6x to 20.9x, but the current level of price-to-cash earnings is only 10.3x.  The historically normal range of price-to-sales per share is .76x to 1.51x, but coming into the day it was only .86x.  If we assumed that the stock were bought for the mid-level of these historical ranges, based on current fundamentals the stock would trade for about $33.  Admittedly, this is a simplistic view of the company, but it would imply a total valuation including debt of $5.9 billion.  With that said, the point of an LBO deal is to find a mispriced asset, so paying a price around the market’s historical valuation would not be considered a great find.  So, when all is said and done, the actual price paid for PTV may be lower than our “fair value” price.

We have no special knowledge of the reported discussions, and make no claims about the prospects for the deal to be carried out.  We would be surprised if PTV were able to secure anything above $33 per share, especially considering its relatively weak performance in the last quarter.  Remember, in its first quarter Pactiv reported profits slipped 38% and missed analyst’s estimates and lowered guidance for the full year.

Read the original story at Ockham Research