On the Deal Q&A: Transcontinental Transforms

Transcontinental signed a deal for Coveris’ flexible-packaging business in just five short days

Montréal-based Transcontinental Inc. acquired the Americas flexible-packaging business of Coveris Holdings SA, a Chicago-based manufacturer of plastics products, for $1.72 billion. The deal marks a major shift for Canada’s largest printer, which has provided printing, publishing and marketing services since 1976. Transcontinental is now positioned across a broad range of flexible packaging’s growing end markets, including dairy, pet food, beverage, agriculture and consumer products.

LEXPERT: We frequently hear about American companies acquiring Canadian ones but not as often the other way around. How did this deal come about?
Christine Desaulniers, Chief Legal Officer and Corporate Secretary, TC Transcontinental: We made the decision in 2014 to diversify our assets in flexible packaging with one objective in mind: generate profitable growth by making sound business decisions. With six prior acquisitions in the flexible-packaging sector, we’d already crossed paths with Sun Capital. Our President and CEO, François Olivier, had been in touch with them over the years to express our interest in their Coveris North American assets, which we’d identified as a potential acquisition opportunity in the packaging space. When they were eventually ready to sell, they launched a formal process; that’s when things started to move. We were invited to participate in the process and we were eventually chosen as the purchaser.
Robert Fonn, DLA Piper (Canada) LLP (counsel for Coveris in Canada): Predominantly, I think what we see are the Canadian targets being acquired by US private equity or US or international strategics. Occasionally we are seeing more opportunities so I think the success stories will continue for Canadian companies that have successful operations to explore outwards.

LEXPERT: Why was it important for Transcontinental to acquire Coveris? What does this particular deal provide the company?
Sidney M. Horn, Stikeman Elliott LLP (external Canadian counsel for Transcontinental): The deal provides scale and geographic reach, access to large and significant customers, and intellectual property and management talent.
Desaulniers: We have built our North American flexible packaging platform from the ground up, starting with the acquisition of Capri Packaging in Missouri in 2014. Acquiring Coveris Americas is a game-changer for us because it enables us to become one of the top 10 flexible-packaging converters in North America. We have expanded our product offering with 21 additional production facilities with best-in-class capabilities, along with film manufacturing capabilities. Coveris Americas had generated approximately $1.26 billion in revenues for its fiscal year ended December 31, 2017.

LEXPERT: Were the negotiations easier since the parties knew each other?
Desaulniers: Yes. Our interest in their Coveris North American assets over the years, combined with the thoroughness of our due diligence process, made a difference by adding credibility to our offer. Even at the initial stage, we showed a real interest in this acquisition, which we understand was well perceived. Since the beginning of our transformation when we started our reflection on how to diversify our activities to ensure our long-term profitable growth, we’ve been doing our homework. Our cross-functional teams, from M&A to finance, as well as legal, while being supported by other key collaborators, were able to leverage their expertise and agility to conclude the transaction within a very short runway, at the right price. To sum it up, closer to the end of the bidding process, the seller could vouch that we’d be able to deliver all of the requirements to get to the finish line right on time to meet their deadline.

LEXPERT: How much of a role does this acquisition play in Transcontinental’s overall strategy moving forward? Are more similar acquisitions planned? Will there be more divestitures of its newspapers?
Horn: I believe that Transcontinental will focus resources on integrating and solidifying this investment before it embarks on further large acquisitions.
Desaulniers: Our strategy for our packaging division has been to grow organically and by acquisitions. Coveris Americas, as a whole, is a rare asset allowing us to reach critical mass in our flexible packaging activities very rapidly. Doing it with more modest acquisitions over time would have taken much longer. Packaging is now our largest division in terms of pro forma consolidated revenues. We’re still in a position to look at other deals, we’ll keep our eyes out for smaller packaging transactions, comprised of assets which are routinely selling between $50 million to $200 million. We are currently focused on the successful integration of this latest acquisition, while ensuring that our printing and media operations run smoothly. With regards to our local and regional publications in Québec and Ontario, we’re now on the heels of having almost completed the sale process of TC Media’s 93 titles, save for the Seaway News newspaper of Cornwall, which is generating interest in the market. That being said, we remain Canada’s largest printer and part of our sales agreements include the printing and distribution of these newspapers.

LEXPERT: Some Coveris food suppliers are in talks with Amazon to supply food packaging for its e-commerce platform. Was that a key consideration for Transcontinental in acquiring Coveris?
Desaulniers: The driving idea throughout this acquisition was to become a leader in flexible packaging in North America. In becoming so, we now have the capacity and the ability to better serve our existing customers, as well as Coveris Americas’ legacy customers, combined with potential new ones seeking to optimize their offerings, such as Amazon’s food offering over the internet. Widening our pool of customers is an upside of this transaction. To put things in perspective, this acquisition complements and bolsters our existing product offering in several end markets, including dairy, pet food and consumer products. It also allows us to enter new and attractive flexible packaging end markets such as agriculture, beverage and protein. Therefore, we are expecting an interest from key players in those areas.

LEXPERT: What efficiencies have been created with this acquisition? 
Desaulniers: We’re unlocking significant cost-saving synergies that we’re looking to realize in the 24 months post-acquisition. These synergies will mainly stem from economies of scale in the procurement of raw materials, as well as from the vertical integration of film manufacturing and the in-sourcing of pre-press and plate-making operations. We are ooking at potential cost-saving synergies estimated at US$20 million.

LEXPERT: What was the level of complexity of this deal?
Horn: It was complex. Both debt and, more importantly, new equity financing had to be put in place at the time that the winning bid was announced.
Fonn: It was a complex deal in terms of a carve-out acquisition of a larger global enterprise, but I think the more interesting thing was the pace at which the transaction transpired. From execution to close, it was a very quick turnaround.
Desaulniers: The complexity of this deal resulted mainly from the short time frame within which the acquisition of a business operating in a number of foreign jurisdictions where we were not already conducting activities, and financing it, the whole in the context of an auction process.

LEXPERT: What was your experience of working on this acquisition?
Desaulniers: It was a great experience, not only working with an outstanding team of people, both internally and externally, but also living with them the transformation of our corporation. We were all working together to realize our strategy. It was motivating to see people being challenged out of their comfort zone, learning from the experience and taking this opportunity to grow.
Horn: I enjoyed very much working with the focused and motivated team at Transcontinental.

LEXPERT: Given the short time frame on this deal, was there also a quick agreement on terms?
Desaulniers: Each party was defending its interests but both sides were working quickly to get a deal done tackling any issues as they were brought to the table. Certainty of closing was a priority of all but not at any condition. We certainly showed our serious interest in purchasing Coveris Americas, always respectful of the other side. Although we had had some exchanges but no negotiations really, it took less than one week to complete the documentation from the time we were chosen as the purchaser to signing. No time was wasted.

LEXPERT: What was the most challenging aspect of this deal?
Desaulniers: The pace at which the team completed this transaction, not only the acquisition per se but also the bank financing and the equity financing. From the time we were chosen as the purchaser, it took literally five weeks to close the deal. We worked during the auction process to stay one step ahead of the game to be able to move quickly if we were chosen as the purchaser; I believe that this allowed us to complete the transaction quickly and efficiently.
Fonn: The efficiency with which the parties resolved to identify the requisite financial information and provide it to allow Transcontinental to complete its financing in an abbreviated time frame, I think were essential to the deal. I think the parties worked pretty efficiently to make sure that happened.

LEXPERT: What was the most memorable or unusual aspect of this deal? What will you take away with you?
Desaulniers: It was a great experience. Days were long, we worked hard but we had fun and never forgot to laugh. We were doing this through long-distance calls with counsel and clients in different cities. At first some of us were skeptical we would achieve signing the deal in five days. We did. Our Chair of the Board and our President and CEO were present the whole time, even serving late dinners to the team!
Fonn: One of the interesting things was the limited involvement of Canadian counsel, at least on the M&A piece. On the finance piece, at least in the discussions I was involved in, there was also limited Canadian counsel involvement, at least at the outset of that process. It seemed to be an efficient, non-acrimonious process.