Canyon Partners Sends Letter to Berry Global\'s Board of Directors
29 February 2020
LOS ANGELES, Feb. 23, 2020 /PRNewswire/ -- Canyon Capital Advisors LLC, the investment advisor to funds and accounts (together with Canyon Capital Advisors LLC, "Canyon") that beneficially own, in the aggregate, over 9 million shares, or almost 7.0% of the outstanding common stock of Berry Global, Inc. ("Berry" or the "Company") (NYSE: BERY), today sent a letter to Berry's Board of Directors and senior management team asking the Company to immediately take the following steps: (1) publicly announce that it has hired an investment bank or other financial advisor to develop a clear plan of action toward accelerated deleveraging; (2) commit to achieving an investment grade rating (and cease M&A activity other than deleveraging transactions); and (3) get in front of environmental, social and governance ("ESG") trends and correct market misperceptions about sustainability.
The full text of the letter sent to Berry's Board of Directors can be read below:
February 23, 2020
Mr. Thomas E. Salmon
President and CEO
Berry Global, Inc.
101 Oakley Street
Evansville, Indiana 47710
Re: Berry Global, Inc. Capital Allocation
Dear Mr. Salmon:
Canyon Capital Advisors LLC is the investment advisor to funds and accounts (together with Canyon Capital Advisors LLC, "Canyon") that beneficially own, in the aggregate, over 9 million shares, or almost 7.0% of the outstanding common stock of Berry Global, Inc. ("Berry" or the "Company"). After extensive study and analysis, we believe that Berry continues to be significantly undervalued and that there are readily available steps by which the Company can unlock significant value for shareholders.
Canyon has been an investor in the packaging industry for decades and has held Berry debt and equity for more than fifteen years. We pride ourselves on being long-term oriented shareholders with supportive management relationships. To that end, we appreciate the steps that Berry took following our prior correspondence to authorize a $500 million share repurchase program in August 2018 and to consummate the acquisition of RPC Group Plc ("RPC") in 2019. We believe Berry has acquired the global scale and innovation expertise to lead the packaging industry into a sustainable future. However, at this point more should be done to unlock value for shareholders.
As described below, Canyon believes that Berry should immediately take the following steps: (1) publicly announce that it has hired an investment bank or other financial advisor to develop a clear plan of action toward accelerated deleveraging; (2) commit to achieving an investment grade rating (and cease M&A activity other than deleveraging transactions); and (3) get in front of environmental, social and governance ("ESG") trends and correct market misperceptions about sustainability.
During the course of Berry's existence as a public company, valuation of the Company's stock has lagged that of peers due to persistent concerns by investors regarding organic volumes, and the stock has been acutely discounted when – as now – leverage is high. In connection with the release of the Company's first quarter 2020 results and the accompanying earnings call, management's tone has been constructive on volumes, but Berry's stock has meaningfully lagged in 2020 YTD (down 6.8% vs. S&P up 3.3% and peer group1 +0.6%) after significantly lagging in 2019 as well (flat vs. S&P up 29% and peer group +34%). While we are encouraged by management's conviction to meet guidance for the fiscal quarters ended March and June 2020, the Company has missed expectations in the past and therefore has failed to give the market confidence in management or its historic levering M&A strategy.
However, we are confident management will deliver on volume growth in the Company's Health, Hygiene and Specialties division and its Engineered Materials division, as was done for the Consumer Products division after years of market concern about the division. As investors in Berry's capital structure for the past 15 years, we appreciate management's efforts to consistently grow margins and cash flow in the course of integrating new businesses, sometimes at the expense of volumes, as the Company eliminates lower margin operations and rationalizes SKUs. We remain confident management will continue its past record of exceeding its cash flow targets, as it has done every year as a public company.
Strategies Should Focus on Deleveraging and Achieving an Investment Grade Rating
But given Berry's rapid growth through acquisition, we believe now is the time to optimize the portfolio of assets by monetizing non-core assets for accelerated deleveraging. We also believe the private market for packaging assets has never been stronger, with EBITDA sale multiples well into the double digits as can be seen in the table below. As such, we believe selling non-core assets would be both highly accretive and deleveraging for the Company.
Berry's stock historically has traded at a discount during periods when it is excessively leveraged. That is the case now, as the Company is operating with a debt/EBITDA ratio of 4.9x. The chart below reflects the market's historical valuation of Berry since it went public and illustrates the Company's leverage over the same period.
A look at Berry's peer group also shows a high correlation between low leverage and stock price performance. We recognize that the Company has had success in generating substantial free cash flow, which has created interest coverage of 4.8x. The last time Berry's leverage was at a level similar to what it is today was in 2016, at which point interest coverage was 4.4x. This would suggest that the Company is in a better position today to handle its financial leverage than it was in 2016, yet the market valuation of the Company today is lower. Berry is significantly undervalued, currently trading at 7.3x 2020 EBITDA and a 14.2% FCF yield while comparable plastic packaging companies trade at 9-12x and 5-6% FCF yields. Berry's closest peer, Amcor, is particularly notable by contrast. The market is valuing it at a 4-5x EBITDA premium to Berry, largely on account of a less levered capital structure and capital allocation policy that allows it to pay a dividend and repurchase shares, all while sustainably reinvesting in its business.
The decline in Berry's stock price is concerning given the performance of the market as a whole, and more worrisome still when Berry is compared to its peer group. Berry has provided a total shareholder return ("TSR") of -15.6% over the past year and -12.4% over the past three years. Over those same periods respectively, Berry's peers group has averaged TSRs of +14.4% and +27.1% while the S&P has returned +19.9% and +41.1%. What is more, the Company's liquidity and the attractiveness of passively owning its stock have been impaired by the Company's not being included in the S&P 400 Index. In our view, the Company's investor relations group could be more proactive in this respect. Anecdotally, Canyon has spoken with large institutional investors in Berry's peer group who have commented that they would like to, but cannot, own Berry's stock with its current levels of leverage.
We believe that the Company's will be able to generate at least $800 million in free cash flow in 2020, but we think that accelerated deleveraging by making targeted divestitures of non-core assets is critical at this stage in order to improve TSR. Berry's sale of the Seal for Life business provides a practical example of how the Company can divest. Canyon believes the Company should immediately retain an investment bank or other financial advisor to evaluate and provide guidance with respect to divestitures and other possible means of accelerated deleveraging.
More Work Needs to be Done With Respect to ESG
Canyon also believes that Berry should get in front of ESG trends and correct market misperceptions about the sustainability of its products. Berry is positioned extremely well in the growing conversation regarding ESG due to the Company's scale, R&D prowess and global partnership with CPG customers who are promising to use more recycled content. The volume growth that the Company is poised to deliver should go a long way toward countering the notion that plastics are unpopular from a sustainability perspective, but more can be done to ensure that the right message is conveyed to the market on these issues.
Examples of companies that have determined to get ahead of ESG perceptions and market storylines regarding sustainability include Nestlé, which has committed to pay $2 billion to develop a market for food grade recycled resins, and Unilever, which transitioned to post-consumer resins for Helmann's Mayonnaise. Berry itself has announced a collaboration with SABIC to drive the innovation and use of polyolefin resins made from chemical recycling, and an agreement with Georgia-Pacific Recycling to create a closed loop system to recover, segregate, and reprocess post-consumer resin. Each of those was a commendable step in shifting toward sustainable products. However, more work on this score is needed.
Although the Company recently has been more vocal with respect to ESG issues, faulty market perceptions have proven difficult to alter. It is readily apparent that the market has embraced the sustainability narrative as it relates to aluminum can makers, which are being valued well above historical average multiples. We believe very strongly that Berry and the rest of the plastic packaging supply chain has an equally compelling sustainability story to tell and we think the Company's efforts to do so can be more focused. ESG ratings should be a high priority for investor relations and management, but the Company appears to be behind the rest of the market in this respect, which is disconcerting given significant investor scrutiny in this area. Management and IR need to address ESG ratings proactively, not reactively as has been the case.
We appreciate that sustainability is a complex issue, and the current market perception that one substrate is "more sustainable" than others is overly simplistic. Misperceptions that should be corrected include those relating to the impact of carbon emissions, water and other natural resource usage, food production, food waste, and end of life treatment (e.g., recycling). As the charts below reflect and the public should be made aware, plastic can mitigate food waste and compares favorably from an environmental perspective to other materials, and an improved recycling rate will make it clear that plastic must be part of the solution, not the problem.
Canyon appreciates the Company's attention to the concerns expressed in this letter. We are available to further discuss those concerns, as well as the strategies we propose regarding them, with management and the Board at their convenience.
CANYON CAPITAL ADVISORS LLC
cc: Board of Directors c/o Jason K. Greene, Executive VP, Chief Legal Officer & Secretary (same address)
About Canyon Partners LLC
Founded and partner owned since 1990, Canyon employs a deep value, credit intensive approach across its investment platform. Canyon specializes in value-oriented special situation investments for endowments, foundations, pension funds, sovereign wealth funds, family offices and other institutional investors. The firm invests across a broad range of asset classes, including distressed loans, corporate bonds, convertible bonds, securitized assets, direct investments, real estate, arbitrage, and event-oriented equities. For more information visit: www.canyonpartners.com.
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