Emma Trincal

Return to Article

Hedge Fund Wants Sonoco Buyback

Emma Trincal

In the latest effort by an activist hedge fund to rein in acquisitive managers, Atlantic Investment Management urged Sonoco Products'(SON) board to consider a one-time $10 million stock buyback.

The fund is seeking either a Dutch tender offer or an accelerated share-repurchase plan, and wants them carried out as soon as possible. Atlantic Investment's Alexander Roepers, with 5.6% of Sonoco's outstanding shares, is the packaging company's second-largest shareholder.

"Shareholders have the right and opportunity to express their opinion," said Alan Cecil, a vice president of investor relations at the Hartsville, S.C.-based global packaging company. He had no further comment.

With the stock trading at $28 a share, the Dutch auction would cost $280 million at current prices. The company had $117 million of cash and equivalents on its balance sheet at the start of the year, and, according to Key Banc analyst Christopher Manuel, is on track to generate about $187 million of free cash flow in 2005.

The company's 90-cent annual dividend will cost it about $90 million this year.

Like Carl Icahn at Kerr-McGee(KMG) and Mylan Labs(MYL), Roepers appears to want Sonoco to shift out of acquisition mode and learn to live with more leverage.

Last year, Sonoco signed two significant agreements: a joint venture for tube and coreboards with Helsinki-based Ahlstrom Corp., and the acquisition of CorrFlex for $250 million. In the Ahlstrom transaction, both companies have the right to force the sale of the joint venture's shares to Sonoco for 3 1/2 years.

A similar put/call agreement was entered last year with Demolli Industria Cartaria, an Italian-based manufacturer of paperboard and engineered carriers.

So far, Sonoco has done well, says Manuel, who has a hold rating, maintaining a leading position in its core markets for paper tube containers and composite cans.

More importantly, he says, the company has been able to offer a generous 3.4% dividend yield while maintaining an investment grade single-A rating. This balance is likely to be compromised if the company increases its leverage. Sonoco has a 44% debt-to-capital ratio, a good level compared with some of its peers in the packaging business with 60%-80% ratios.

A buyback would push up the debt-to-capital ratio. In short, "It could hurt the company," says Manuel.