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Berry Plastic Group (BERY) made its public debut on Thursday, Oct. 4, 2012. Shares of the provider of consumer packaging ended their first day of trading down 5.0%, at $15.20 per share.

The Public Offering

Berry Plastics Group is a leading provider of plastic consumer packaging and engineered materials. The company has been around for over three decades. Berry sells its products mostly to consumer-oriented end markets including food, beverage, healthcare, and personal care. The company has reported a net annual sales growth rate of 24% over the past 11 years, as the company acquired 11 businesses over the past six years.

The company sold 29.4 million shares for $16 a piece. Berry Plastics raised $470 million in gross proceeds in the offering process. Based on the offer price of $16.00, the firm is valued at $1.8 billion.

The offering was quite a disappointment. The offer price was set at the low end of the preliminary $16.00-$18.00 price range set by the firm and its bankers. The firm sold 29.4 million shares, while selling shareholders did not offer any shares. In March of 2006, Apollo Global Management and Graham Partners acquired the firm for $2.25 billion. In total, 26% of the company's shares outstanding were offered. At Friday's closing price of $15.00 per share, the firm is valued at $1.69 billion.

The major banks that brought the company public were Bank of America Merrill Lynch, Citigroup, Barclays, Deutsche Bank Securities, Credit Suisse, and Goldman Sachs, among others.

Valuation

Berry Plastics operates in the market for plastic consumer packaging. The company operates 82 manufacturing sites, supplying over 13,000 customers. The company offers employment to over 15,000 employees. The company reported annual revenues of $4.56 billion for its annual 2011, ending October 2011. The company reported a net loss of $299 million. For the trailing 12 months ending June 2012, Berry Plastics reported revenues of $4.79 billion, on which it lost $212 million.

Berry Plastics intends to use the $470 million of gross proceeds of the offering to repurchase or redeem $455 million of the 11% Senior Subordinated Notes due in September 2016. Excluding the offering proceeds, the company operates with negligible amount of cash. The company operates with $4.6 billion in total debt, or $4.1 billion in net debt, including the redemption of the senior notes.

Based on trailing annual revenues of $4.79 billion, the market values the equity of the firm at 0.35 times annual revenues. The company lost $212 million over the past 12 months, and profitability will improve after the company will repay roughly $455 million in debt, carrying rates of up to 11%. Still, the company will likely report a loss for the next year.

Investment Thesis

As noted above, the offering of Berry Plastics was quite a disappointment. Shares lost 5.0% on their first trading day, ending the week at $15.00. As such, shares are trading some 9.1% below the midpoint of the initially guided range. Given the sizable debt position, Berry Plastics does not expect to pay a dividend soon.

The sentiment around Berry Plastics is relatively bad. For the year ended October 2011, the company paid $327 million in interest payments on its $4.6 billion debt position, for a weighted average interest rate of 7.1%. The company net lost $299 million for the year mainly as a result of the interest payment, as well as restructuring and impairment charges totaling $221 million in 2011.

Investors in Berry Group are not enthusiastic about the offering. Operational performance of the company has been very strong, and the company has steadily grown its operations in recent years. There is a simple reason why investors are not enthusiastic. The company has been saddled with debt by Apollo Global and its partners. The company operates with $4.1 billion in debt, at a high annual cost of 7.1%. Excluding the interest payments on the large debt position, the company would have been profitable last year.

Investors have a healthy dose of skepticism regarding Berry Group. While the deal is great for the private-equity firms, private investors have little taste to acquire a debt-laden company with a risky balance sheet. I stay on the sidelines as the debt load is going to impact the bottom line for years to come, and imposes significant risks on the equity investment of investors.

Source: Berry Plastics Group - Stay Away From This Debt-Loaded Public Offering