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Sealed Air Sells Diversey Japan Biz.

Zacks Equity Research

Sealed Air Corporation ( SEE) has completed the previously announced sale of Diversey Japan, an indirect subsidiary of Diversey, Inc. to The Carlyle Group for gross proceeds of 30 billion yen or approximately $373 million. 


Of the proceeds, approximately $300 million will be utilized to prepay a portion of the company’s term loans currently outstanding under its senior secured credit facilities. As of September 30, 2012, Sealed Air’s long-term debt, excluding current portion, amounted to $4.49 billion as of September 30, 2012.


Diversey, acquired by Sealed Air in October 2011, offers a wide range of products and services designed primarily for use in five application categories: food service, food and beverage manufacturing and processing, floor care, restroom care and other housekeeping, and laundry. On October 30, 2012, the company signed an agreement to sell its Diversey operations in Japan. The business has generated $230.8 million in sales and $25.9 million in operating profit in the first nine months of 2012.


The company had classified the Diversey Japan business as discontinued operation in its third quarter results. Sealed Air reported third-quarter 2012 adjusted net earnings from continuing  operations of 28 cents per share, 42% lower than the year-ago earnings of 48 cents per share. Including discontinued operations, earnings per share were 31 cents in the quarter compared with 48 cents in the year-ago quarter.


Total revenue surged 52% year over year to $1.9 billion but missed the Zacks Consensus Estimate of $1.99 billion. The Diversey acquisition contributed 56% to the growth while organic growth was 2%, offset by an unfavorable foreign currency translation of 5%. Volumes showed a slight improvement across all regions barring Europe.


Sealed Air's Diversey acquisition is the second largest in the company's history, just behind the $4.8 billion purchase of the Cryovac food-packaging business in 1998 from W.R. Grace & Co. With the Diversey acquisition, Sealed Air expanded its presence beyond specialty packaging solutions. This combination is expected to further enhance Sealed Air’s earnings per share and free cash flow generation. 


On the flipside, Sealed Air's first half results were weaker than expected due to low volumes at Diversey. Volumes were down 2% in the first quarter and 3% in the second, mainly due to weakness in Europe. However, there was a slight improvement in the third quarter as volumes were down a modest 0.2%. Given that 52% of Diversey's sales come from Europe and with no significant improvement in the economic conditions, we believe results from Diversey will remain affected.


Furthermore, even though Diversey has added to the company's growth profile, it also exposed Sealed Air to risk due to the high levels of leverage the company has incurred to fund the acquisition. Given the size of the deal, we are apprehensive regarding integration risks. 


Elmwood Park, New Jersey-based Sealed Air is a major specialty packaging service provider to a diverse set of end markets. The company operates in the United States and in 50 other countries with packaging and performance-based materials and equipment systems serving food, medical, and an array of industrial and consumer applications. Sealed Air faces competition from companies like Bemis Company, Inc. ( BMS) and Sonoco Products Co. ( SON). The stock retains a short-term Zacks #3 Rank (Hold).

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