Berry Global: The Catalyst Is Coming

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Includes: BERY
by: Max Rabkin
Summary

72% of debt coming due in the next 5-years likely to cause problems.

Tax shield no longer advantageous and M&A outcomes are less favorable.

Multiple expansion reasonable at peer level Debt/EBITDA levels.

20%+ upside on the stock but needs a catalyst to trigger the move.

For this article I have chosen to prepare a slide deck to cover my investment thesis and valuation. In addition, I have summarized my ideas below as an outline for the deck.

Berry Global maintains the private equity mindset it was built around since being taken public by Apollo in 2012. I am in favor of the levered M&A strategy to consolidate the industry and believe this business is one of the higher quality operators in this competitive and fragmented space. However, I believe BERY will likely need to de-lever around $680 million of debt from asset sales/restructuring to hit the industry target leverage ratio and avoid credit rating issues over the next 3-5 years. This is possible due to the collection of assets they have bought over the years that are not integrated but have increased in value through cost cutting.

This appears to be a reasonable and achievable target, and would make sense given the thesis I present in my pitch around stability in the WACC. I believe the entry of significant positions from hedge funds will help to influence and prompt this restructuring as well refinancing headwinds.

I believe that a reduced leverage ratio will ease negative sentiment that has clouded the stock recently. Looking at BERY on an EV/EBITDA multiple basis it is currently trading in line with the peer group but when looking at the P/E it trades at a considerable discount, I attribute this to the discount for financial distress.

BERY could be worth between $63-$68 if the Company or an activist take steps to address the firms capital structure, which will unlock shareholder value and allow the firm to return to its track record of added-value in the M&A market.

Disclosure: I am/we are long BERY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: *This article based on research and due diligence using various sources and information gathering processes. Please use objectivity when making investment decisions. This is a thesis based on analysis of the firm and should not be taken as expert insights.