Chesapeake Makes Cash Offer for Field Group

Chesapeake Corp. has offered to acquire all of the outstanding shares of Field Group Plc, a leading European packaging company headquartered in the UK. The all-cash offer, which will be made through a Chesapeake subsidiary, Chesapeake UK Acquisitions Plc, values Field's issued share capital at approximately $320 million.

In other action, the company reported that its fourth quarter 1998 earnings were up 46% compared with the same quarter in 1997. It also reported that sales for 1998 were up 10% over 1997.

Field Group acquisition

Including assumed debt of approximately $50 million, the total Field Group enterprise is valued at $370 million. Chesapeake's board of directors has unanimously recommended the offer to its shareholders.

Field specializes in the design and production of cartons, containers, printed leaflets, and labels. The company is focused on three customer sectors: pharmaceuticals and healthcare, international and branded products, and food and household. It operates 17 facilities in the UK, Ireland, the Netherlands, Belgium, and France.

Thomas Johnson, Chesapeake's president and CEO, points out that "Field is a perfect fit with Chesapeake's strategy of developing its higher margin packaging businesses. It is a significant move internationally, and will provide Chesapeake with a platform for growth in European markets."

Johnson adds that "we also see this as a great opportunity to take advantage of synergies with our existing luxury and pharmaceutical packaging businesses based in France and North America. Field has a value-added, solution-based marketing strategy that is very similar to Chesapeake. With Field's established branded base and reputation for quality, Chesapeake expects to be able to rapidly develop a pan-European supply network."

Field's pharmaceutical and healthcare division offers a pan-European integrated solution for cartons, labels, and leaflets, according to Johnson. Its international and branded products division produces packaging and labels predominately for the drinks, tobacco, and confectionery markets. Its food and household division has established key relationships with multinational consumer products companies.

"In addition to promising attractive financial returns, Field offers an excellent customer base, a strategic approach to the market, and an experienced management team," Johnson emphasizes. For the 53 weeks ending April 4, 1998, Field reported profits before tax of $40 million on revenues of $400 million.

"Chesapeake is focused on continuing to deliver long-term and sustainable value for our shareholders and this transaction provides us with another platform for growth,'' Johnson continues. "Field has a solid financial track record and will provide a critical mass to build upon, and should be accretive to Chesapeake's earnings in the first year of acquisition. Its management team, led by Field's chief executive Keith Gilchrist, has an excellent reputation among its customers, as well as in the financial markets. For all of these reasons, we are very excited about the prospect of Field joining Chesapeake Corp."

The completion of the offer is not subject to financing, which has been committed by First Union National Bank, but is subject to other customary conditions, including the receipt of a satisfactory level of acceptances of the offer. Donaldson, Lufkin & Jenrette is acting as the financial advisor to Chesapeake in relation to the offer for Field.

Fourth quarter, year 1998 results

Chesapeake's net income before restructuring charges for the fourth quarter of 1998 of $11.0 million, or $0.51/share, was up 46% compared with pro forma net income of $7.9 million, or $0.35/share, in the fourth quarter of 1997.

Fourth quarter 1998 net income, including the previously announced restructuring charges related to the company's tissue and specialty packaging businesses of $8.8 million after tax, or $0.41/share, was $2.2 million, or $0.10/share.

The provision for restructuring includes costs related to two facility closures, salaried layoffs in the U.S. packaging businesses, and workforce reductions in the tissue segment. Net sales for the quarter were $235.9 million, up 3% from fourth quarter 1997 sales of $228.5 million.

Net income before restructuring and the cumulative effect of an accounting change for the full year 1998 was $42.8 million, or $1.98/share, 71% higher than pro forma net income of $27.2 million, or $1.16/share, from ongoing operations for the year 1997. After giving effect to the fourth quarter restructuring charge and the cumulative effect of an accounting change, net income for 1998 was $47.3 million, or $2.19/share.

The change in accounting consists of the capitalization of certain timber reforestation costs (that were previously expensed) in order to achieve better matching of these costs with the revenues realized from the eventual harvesting of the timber. This accounting change was applied retroactively to January 1, 1998, and had the cumulative effect of increasing 1998 net income by $13.3 million, net of income taxes, or $0.62/share. The impact of this change in accounting method, exclusive of the cumulative effect of the accounting change, increased 1998 net income by approximately $7 million, or $0.03/share.

Full year net sales for 1998 were $950.4 million, or 10% higher than pro forma net sales of $865.5 million from ongoing operations for the year 1997. Reported net sales for 1997, including divested businesses, were $1,021.0 million, with the company reporting 1997 net income of $48.6 million, or $2.08/share.

Reported net income for the year 1997 included: an after-tax gain of $49.1 million, or $2.07/share, on the second quarter 1997 sale of the West Point kraft products mill and four box plants to St. Laurent Paperboard Inc.; restructuring charges of $10.8 million after tax, or $0.45/share; and an extraordinary loss of $2.3 million, or $0.10/share, net of income taxes, related to the repurchase of debt.

Commenting on the results, Johnson said that "we are very pleased with the favorable sales and earnings comparisons with the prior year for all three business segments. We achieved our financial goals for 1998 and continue to make operational improvements that position Chesapeake for future earnings growth."

Tissue segment

The company's tissue segment net sales of $102.0 million for the fourth quarter of 1998 were down 3% compared with net sales of $105.2 million for the fourth quarter of 1997, due to lower selling prices, offset in part by higher volumes of converted products. Tissue segment EBIT of $16.5 million for the fourth quarter of 1998 increased 11% compared with the fourth quarter of 1997, due primarily to higher volume and improved operating efficiencies.

Full year 1998 net sales of $433.3 million were up 6% compared with 1997, while full year 1998 EBIT of $69.6 million was up 25% compared with the year 1997. The improvements in 1998 sales and EBIT are the result of substantial growth in converted product volume, higher sales of jumbo rolls, and improved operating efficiencies. The company recently announced plans to build a new tissue mill and converting facility in Halifax County, NC ( see related story).

Speciality packaging

Fourth quarter 1998 net sales of the specialty packaging segment of $123.1 million were up 10% compared with fourth quarter 1997 net sales of $111.6 million, due primarily to higher display volume and higher prices in the corrugated container business.

Fourth quarter 1998 EBIT for this segment was $5.4 million, up 64% from EBIT of $3.3 million in the fourth quarter of 1997, due primarily to volume growth and ongoing cost reductions. Full year 1998 net sales were $472.3 million, up 13% compared with pro forma net sales from ongoing operations of $416.8 million in 1997, due to higher display and graphic packaging volume and higher corrugated container prices.

Full year 1998 EBIT was $13.3 million, up $7.9 million from pro forma EBIT from ongoing operations of $5.4 million in 1997. This improvement was the result of volume growth, higher capacity utilization, and operating cost reductions, partially offset by slightly lower corrugated container margins.

During the fourth quarter of 1998, the company completed its acquisition of Capitol Packaging Corp., a specialty packaging company in Denver, CO.

Forest products/land development

Net sales of $10.8 million for the forest products/land development segment for the fourth quarter of 1998 were down 8% compared with net sales of $11.7 million for the fourth quarter of 1997, due to lower pine lumber and pulpwood prices, offset in part by higher land sales and higher pine lumber volume. EBIT for the fourth quarter of 1998 was $2.8 million, down 30% compared with EBIT of $4.0 million for the fourth quarter of last year, due primarily to lower pine lumber prices.

Net sales for the year 1998 were $44.8 million, up 18% from net sales from ongoing operations of $38.0 million for 1997, while EBIT for the year 1998 was $16.3 million, or 29% higher than 1997's EBIT from ongoing operations of $12.6 million, due to higher pine lumber volume, the addition of external pulpwood shipments, and higher land sales partially offset by lower pine lumber prices.

Finance

Chesapeake's net debt-to-capital ratio was 28% at the end of 1998, the same as at the end of 1997. Lower cash balances during the fourth quarter 1998 increased net interest expense by $1.3 million compared with the fourth quarter of 1997. Cash at the end of 1998 of $62.4 million was $10.9 million lower than at year end 1997, due primarily to the company's stock repurchase program and the completion of the Rock City Box Co. acquisition in February and the Capitol Packaging acquisition in November.

The company's effective income tax rate was 39% for 1998 compared with 40% for 1997. The difference between the company's effective income tax rates and the statutory income tax rates is the result of purchase accounting adjustments resulting from one-time dispositions and restructuring charges.

Outlook

The company expects revenue for 1999 to be in the $970-million to $1.0-billion range. Full-year earnings improvements in all three business segments (tissue, specialty packaging, and forest products/land development) are expected in 1999 compared with 1998.

The company's effective tax rate in 1999 is expected to be 36.5%. Capital spending for 1999 is expected to be approximately $80 million, compared with $73 million in 1998, excluding acquisitions.

Depreciation, depletion, and amortization is expected to be approximately $66 million in 1999, up from $62 million in 1998. Earnings per share expectations are in the range of $2.15 to $2.35/share for 1999.

Headquartered in Richmond, VA, Chesapeake is a tissue, specialty packaging, and forest products company with more than 40 locations in the U.S., France, Mexico, and Canada.