Graham tender offer changes puzzle critics; takeout may not be goal

By Paul Deckelman

New York, July 19 - Graham Packaging Co. Inc. announced changes to its tender offer for its existing bonds but left the overall total consideration for holders tendering bonds and consenting to indenture amendments by an extended early tender/consent deadline unchanged, leaving observers and critics wondering: what's up?

In answer, there were suggestions Tuesday that the York, Pa.-based packaging maker may not actually be that interested in taking those bonds out ahead of its proposed acquisition by Reynolds Group Holdings, Ltd. but might be more focused on merely changing the covenants of the bonds that would be left outstanding and, presumably, liable to being taken out somewhere further down the line.

Graham announced on July 7 that it was tendering for any and all of its outstanding $375 million of 9 7/8% senior subordinated notes due 2014, its $253.4 million of 8¼% senior notes due 2017 and its $250 million of 8¼% senior notes due 2018 and was also soliciting the consents of holders of each series of those notes to amend their respective indentures to remove the 101% change-of-control put provision. It announced changes to its offer late Monday.

Terms revised

While it cut the basic tender offer price that it is offering to the holders of the 2017 and 2018 notes for their bonds to $985 per $1,000 principal amount of notes tendered from the original $995 per $1,000, it increased the consent fee payable to holders who deliver consents prior to the early tender/consent deadline to $25 per $1,000 principal amount from the original $15 per $1,000. The early tender fee for such holders remains $10 per $1,000 principal amount, meaning the total consideration for holders tendering their bonds and delivering consents remains $1,020 per $1,000 principal amount, the same as the original announcement.

Graham also announced a one-day extension of the early tender/consent deadline for the holders of the two classes of senior notes to 5 p.m. ET on Wednesday; that deadline had originally been scheduled for 5 p.m. ET on Tuesday.

The terms of the offer relating to the 9 7/8% senior subordinated notes were left unchanged, as were all other terms announced on July 7, including the ability of noteholders to deliver consents to the proposed indenture change without actually tendering their bonds and vice versa and the offer's overall expiration deadline, 8 a.m. ET on Aug. 4.

The changes are unusual in that there was no increase at all in the overall total consideration being offered to the bondholders, as often happens in cases where a company announces a tender offer and bondholders either fail to tender their bonds as the deadline draws near because they feel the price being offered is inadequate or sometimes openly announce opposition and attempt to pressure the company into sweetening its offer.

A spokesman for Credit Suisse Securities (USA) LLC, the tender offer dealer manager and solicitation agent for the consent solicitation, on Tuesday declined to comment on the rationale behind the changes that were made and whether they were undertaken because of bondholder reluctance to go along with the original terms.

Changes puzzle observers

Among those trying to wrap their heads around the meaning of the revised offer on Tuesday was analyst Robert Matz of Covenant Review LLC, a New York-based research service that specializes in analyzing bond indenture covenants and tender offer terms.

After Graham announced its initial tender offer terms, he authored a report critical of the deal, calling the $1,020 per $1,000 total consideration "paltry," even "insulting." He termed the logic behind the offer "absurd" and recommended that holders of the senior notes do nothing in hopes of getting a better deal. (Matz did say that the offer might be attractive to the 2014 subordinated noteholders, whose bonds are already callable at below the total consideration price.) Matz also authored a follow-up report last week questioning whether a proposed $2 billion senior secured intercompany note to be issued by Graham to Reynolds as part of the takeover deal's funding, ostensibly to refinance Graham's outstanding credit facilities at the closing of the acquisition, might in fact violate some provisions of the Graham bonds' indentures. He suggested that bondholders seek more transparency from Graham and Reynolds on this point.

On Tuesday, Matz mused that "it's just hard to really judge what the purpose of this change is," noting that from a purely economic perspective, the overall total consideration that Graham is offering to its holders "has not gone up, and the consent fee didn't seem to go up significantly."

He said that "it's very difficult to understand how such a small change can really be expected to have a big effect," and he pointed out the fact that a sizable number of the noteholders - perhaps as much as nearly 80%, he said - had expressed dissatisfaction with the original offer terms.

"I don't know why [a bondholder] would accept the consent [fee] at a slightly higher price than it was before, with nothing else changing."

The analyst theorized that perhaps other strategies than simply taking out the bonds might be coming into play - especially since both the 2017 and the 2018 bonds have been trading, and continued to trade on Tuesday, around the 106-107 level, well north of the tender offer's 102 total consideration takeout price.

One suggestion heard is that Graham and Credit Suisse seem more focused on gaining the noteholders' consent to the indenture change removing the 101 put than buying back the bonds in the tender offer, since Graham increased the consent fee but kept the total consideration the same.

Reynolds, an Auckland, New Zealand-based manufacturer and supplier of consumer food and beverage packaging and storage products, announced on June 17 that it agreed to acquire Graham for $25.50 per share in a deal valued at $4.5 billion including net debt.

Reynolds said at that time that it had not made any decision as to whether it would retire Graham's existing senior notes and senior subordinated notes, adding that to the extent the notes remain outstanding after the acquisition, Graham will be required to make a change-of-control offer.

A market source opined that the higher prices at which the bonds continue to trade may reflect unrealistic expectations held by some analysts and other market participants before the Reynolds announcement of the kind of takeout levels those bonds would command.

© 2015 Prospect News.
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