Description
PGI announced today, it's financial restructuring plan. CSFB Global Opportunities Partners (GOP) has invested (cash and debt exchange) $550mm in PGI . This reduces the amount of debt by $550mm thus increasing the equity by $550mm. A special shareholders meeting is scheduled for April 15, 2002 to vote on a 1:10 reverse stock split. (32mm shares reduced to 3.2mm for the existing shareholders). GOP will receive 22.4mm shares (87.5%) of the new shares, leaving PGI with 12.5% of the new equity. Total new shares will be 25.6mm.
Balance Sheet 9/01
Total Assets $1.48B intangibles $241mm
Total Lia. $1.30B $1.07B LTD
Equity $ 178mm
Post Restructuring
Equity $728mm ($178 + $550)
New shares 25.6mm
Restructured Price/Book $28.44
Effective Book/Share (12.5%) $ 3.55
The current book value is $5.95 share, however with $1.07 billion in long-term debt and $178mm in equity PGI was struggling. New equity, $728mm and LTD reduced to $520mm, makes for a sensible capital structure. With $550mm of debt reduction, PGI will reduce its annual interest expense by about $49mm.
PGI is the world's third largest producer of nonwoven fabrics and a leading supplier of polyolefin materials (disposable wipes, surgical covers, diapers.) J&J and P&G together account for 31% of sales. Jerry Zucker and other O&D own 46% of the existing common.
PGI has had its problems in the past couple of years. Not to mention pricing pressures from abroad, increasing energy costs, and raw material costs, PGI was hit hardest by weak demand (recession) and a strong dollar. For 9 months ending in September 2001, $3.3mm was lost from the strong dollar. Polypropylene is the main raw material for production and from the websites the price trend is downward. This would be a plus for PFI in 2002. Additional cost for their APEX technology were also higher than expected and I may add, sales were not very encouraging.
However, APEX is a main part of my investment theme. It has various applications that are suitable substitutes for woven fabrics. It has the look and feel of traditional knitted material. APEX, I understand can cut the cost of manufacturing by up to 2/3 on many products. The current problem is that the textile industry as a whole is experiencing difficulties and orders for APEX have been slow.
Unlike most of my investments, I do not have a target price. But with it's new capital structure, the downside is much limited. PGI historically has not shown a great return on capital or equity (never above 5.7% ROI or 11.6% ROE). My hope is that they can return to profitability as demand increases (from recession) and the APEX technology boosts sales. At 50% of "new book" it is $1.77 - not bad. With any luck on profitability in the next few year (dollar cooperating, polypropylene resin prices dropping, and a textile industry improvement (many of the vertically integrated should be O.K.), a moderate ROE of 10% should price PGI at or above book. I'm not expecting PGI to turn into a modern growth story, but I've made a few bucks having companies go from bad to average!
I apologize in advance, I'm leaving for the weekend and will be back on Monday for any questions or comments, but as the news was released today, I decided to post it anyway!
Catalyst
New GOP investment, strengthening the balance sheet and allowing time for PGI to improve profitability and for APEX technology to commercialize.