Incorporated: 1960 as Devro Inc.
Sales: $302.2 million (2001)
Stock Exchanges: London
Ticker Symbol: DVO
NAIC: 325188 All Other Basic Inorganic Chemical Manufacturing
Based in Glasgow, Scotland, Devro plc is the world’s largest supplier of collagen products to the food industry. Collagen is a natural protein found in the connective tissue of cowhide, which the company uses to make casings for sausages, hot dogs, and similar products, as well as film for packaging ham, salami, and other processed meats. In addition, Devro produces collagen as a commodity for the medical and cosmetic markets. The company maintains manufacturing facilities in Scotland, Australia, the Czech Republic, and South Carolina in the United States. Sales offices are located in Scotland, Germany, New Zealand, Australia, Japan, Hong Kong, the Czech Republic, and the United States.
Origins in 1950s Johnson & Johnson Research
Devro owes its existence to the research efforts of Johnson & Johnson, the New Jersey-based multinational manufacturer of healthcare products. Johnson & Johnson was established in 1885 to produce packaged, antiseptic surgical dressing, and over the ensuing decades it developed such well-known products as Band-Aid brand adhesive bandages and Johnson’s Baby Cream. In the 1950s Johnson & Johnson researchers began looking for an absorbent, flexible material to be used in a new type of surgical suture; their search led to experiments with collagen.
Not only did collagen show promise as a suture material, the research team realized that it had other potential uses, including the unlikely application to sausage casings. For hundreds of years sausages and similar foods relied on the cleansed intestines of sheep, cows, or pigs. Casings made out of reconstituted collagen were a revolutionary improvement over animal gut because in addition to being edible and hygienic they were of consistent quality and could be produced in long, compressed slugs, allowing processors to quickly produce varying lengths of meat products. Moreover, collagen casings were strong and durable, able to withstand the pressure of meat blasted into them, as well as possessing qualities that allowed them to be frozen or fried without breaking. The raw material was created from the corium collagen layer of cowhide, sandwiched between the grain leather and the cow’s layer of flesh and fat. The corium split was a byproduct of tanneries, produced by the removal of the grain layer before producing leather. This split was then washed and processed in large rotating drums, resulting in collagen fiber that was further refined until it reached a suitable state and could be used in various applications.
Johnson & Johnson had a longstanding practice of forming subsidiaries to be responsible for specific product lines once they reached a certain size. For instance, a 1930s birth control pill evolved into the Ortho Pharmaceutical Corporation, and in 1949 the company’s suture business became Ethicon. In 1960 Johnson & Johnson established a separate collagen business, which it named Devro after the unit responsible for the collagen project: “Development and Research Organization.” Although the application of collagen for sutures never became a commercial success, collagen casings found a ready and eager marketplace.
Devro began production of casings in 1963 in Somerville, New Jersey. In 1964 the subsidiary opened a second factory in Moodiesburn, Scotland, and another Scotland facility was built in 1976 in Bellshill. Devro in the late 1970s began to target the Asian market in the hope of substituting collagen casings for the traditional pig intestines used for Chinese sausages. In order to serve a potentially large Asian market, Devro opened a large manufacturing plant in Bathurst, Australia. Cracking the Asian market, however, proved problematic and would remain a desirable yet elusive market for the next 20 years.
Completion of LBO in 1991
Devro was a profitable niche business, the leader in the edible collagen sausage casings market, yet by the mid-1980s Johnson & Johnson began looking to sell Devro as part of an effort to focus its attention on its core healthcare assets. It appeared that in January 1990 the parent company had a buyer in a group of investors led by Devro’s president, Christopher B. Chaffey, but the deal fell through. By now the subsidiary was posting nearly $120 million in annual revenues and generating operating income of close to $30 million. Finally in May 1991 Johnson & Johnson found a buyer in a management team led by Frank de Angeli, a Johnson & Johnson executive. The $173 million purchase was arranged by Charterhouse Development Capital Ltd. with backing from eight international institutional investors. Another syndicate of nine international banks, including the First National Bank of Chicago, Industrial Bank of Japan, and Royal Bank of Scotland, provided more than $115 million in loans and revolving credits to secure the deal.
Devro’s headquarters were moved to Moodiesburn, Scotland, where the company would be suitably positioned to carry out management’s goal of concentrating on European markets—as well as a continued emphasis on the Far East. To pay off some of the debt incurred from the buyout, Devro was taken public, floated on the London Stock Exchange, where it began trading in June 1993. The transition was not without incident, however. The man hired as the chief executive to replace a retiring de Angeli and take the company public did not have the confidence of the City, the London investment community, and he was paid off even before assuming the job. He was replaced by Graeme Alexander, who had been in charge of marketing. Soon after he took over as CEO and Devro completed its initial public offering, Alexander and his management team assessed the state of the company in order to determine a future direction and reassure shareholders that a one-product company was a safe investment. To position Devro as a collagen company would have meant becoming fully committed to such areas as food additives, cosmetics, and biomedical. Instead they decided to focus on other types of casings, and in this regard in 1994 began to study Chicago-based Teepak International, which not only produced collagen casings but also noncollagen synthetic casings using cellulous and fibrous food materials. Teepak recorded revenues of $60.9 million in 1994, while Devro International and its U.S.-based subsidiary, Devro North America, combined for $169.5 million in sales. Established in 1933, Teepak had a significant history in the casings industry. It developed its first cellulose casings in 1934, followed by the 1944 introduction of the Wienie-Pak.
In March 1995 Devro reached an agreement to acquire Teepak for $135 million in cash and the assumption of $155 million in debt. The deal was contingent upon securing approval from the Federal Trade Commission (FTC), which soon showed concern that the merger might violate antitrust laws because it would likely result in higher costs for collagen casings in the United States where there would now be no competition. After nine months Devro and the FTC finally reached a settlement that permitted the acquisition of Teepak in exchange for the divestiture of Devro North America. In January 1996 the acquisition was finally completed, and in August of that year the Devro North America business (composed of the Somerville, New Jersey manufacturing plant and a finishing plant in Ontario, Canada) was sold to Nitta Gelatin, part of Japan’s Nitta family of companies, resulting in the creation of Nitta Casings. The reported purchase price was $26 million.
Following the merger with Teepak, the company changed its name to Devro-Teepak. Included in the transaction was a 56 percent interest in a Czech casing maker, Cutisin, which operated two manufacturing plants and a sales office in the Czech Republic. Over the few years Devro increased its stake in Cutisin, totaling 96 percent by 2000, with the ultimate intention of owning the entire business. The Teepak deal also brought with it a manufacturing facility in Belgium, finishing operations in The Netherlands and the Czech Republic, and sales offices in Switzerland, Russia, and the Czech Republic. Although Devro gave up its New Jersey plant, it gained Teepak’s Danville, Illinois, factory as well as a Sandy Run, South Carolina, manufacturing facility and finishing plants in Kansas City, Missouri; Atlanta, Georgia; and Scarborough, Canada—in addition to sales offices in Chicago and Miami. The first year following the Teepak acquisition Devro posted strong results, despite an outbreak of Bovine spongiform encephalopathy (BSE), commonly known as Mad Cow disease, in England. Because of the connection between collagen and cattle, Devro was quick to turn to non-British hides, a move that reassured customers and prevented any serious erosion in business. Overall the company appeared well positioned for strong ongoing growth, as management focused on the Asia-Pacific market and Eastern Europe, where demand was strong in Russia and other former Soviet states. Moreover, traditional gut sausage skins still accounted for more than half of all casings sold around the world, providing considerable room for growth in collagen casings.
Devro is the world’s leading manufacturer of collagen products for the food industry. In addition the company manufactures a range of plastic casings, supplies customers in the food industry with a range of distributed products and also supplies pure collagen raw materials for use in the healthcare industry.
Stock Price Peaks in May 1998
To investors Devro was well regarded, and because of its large market share and high margin the company was deemed to be immune from the normal fluctuations of the food industry. Its dominant position also was thought to be assured because of the large investment that would be required for a competitor to match Devro’s production facilities and gain entry to the industry. As a result, investors bid up the price of Devro’s shares, which peaked in May 1998. Then management issued profits warnings in back-to-back months, prompting a dramatic slide in the price of the stock. Management cited a number of reasons for the shortfall, which was mostly limited to the cellulose casing business. Poor economic conditions in Latin America, Southeast Asia, and Eastern Europe, as well as sluggishness in parts of Western Europe, and poor weather in England that resulted in fewer barbecues, were cited as reasons. In addition, the company’s margins were hurt by the strong performance of sterling in relation to the mark and yen.
The situation grew so poor for Devro that by 1999 the company became the subject of takeover rumors, including the possibility that Alexander might take the company private. After some six months of intense speculation, Alexander finally insisted that there was no truth to the rumors of management taking the company private. Instead Devro continued a restructuring effort launched earlier in the year. Matters only worsened in 2000 when BSE was discovered on the Continent, as was listeria in hot dogs in the U.S. market. Although Devro’s products were considered safe and passed health regulations, many customers simply refused to purchase casings made from collagen drawn from British herds. As a result Devro was forced to buy source collagen from the United States and Australia at a much higher cost. Many consumers in Europe simply stopped eating meat. An outbreak of foot-and-mouth disease in 2001 in the United Kingdom only served to exacerbate an already difficult business environment for Devro.
With BSE and foot-and-mouth crippling its business, Devro had to cut back on production. More important, management decided to focus on collagen and sell off its interests in cellulose. It proved difficult to find a buyer, however, and it was not until August 2001 that Devro was able to announce that it was selling its cellulose and fibrous food casing business to Lake Pacific Partners, LLC, a Chicago-based private equity firm in a $48 million deal, of which $7.2 million was in cash and the balance in assumed liabilities. Lake Pacific was established in 2000 by William R. Voss, the former chairman and CEO of National Nutrition Group, and Terry E. Sebastian, a senior vice-president of the company. Together they raised $100 million to invest in small- to mid-sized food and consumer products companies. Lake Pacific created a holding company, Teepak LLC, to buy the Devro assets and established a headquarters in Lisle, Illinois.
Devro endured a difficult 2001, but with a worldwide economic climate worsening in the ensuing months, 2002 proved to be another difficult year. In an effort to cut costs and improve profits, Devro initiated a restructuring of its operations, allowing for more local autonomy by setting up regional businesses in the Americas, Europe, and the Asia-Pacific region. One positive development in 2002 was the announcement that the company had developed the world’s first casing made from pork collagen, a product long requested by pork sausage makers who been forced to rely on beef or lamb collagen casings. The long-term fate of Devro, however, was uncertain. In early 2002 the company appeared to be in the sights of a mysterious buyer. A Swiss-registered company named Acomita Investment, named after a town in New Mexico, began buying up large blocks of shares of Devro stock, prompting press speculations of a takeover. It was generally assumed that Acomita was a front for a food group bidder.
Devro (Scotland) Limited; Devro Holdings Limited; Devro New Holdings Limited: Devro Acquisition Corporation.
Nitta Casings Inc.; Viscofan S.A.; Viskase Companies, Inc.
- Devro is formed as a Johnson & Johnson subsidiary.
- Company opens a plant in Scotland.
- A plant is opened in Australia.
- The company undergoes a management buyout.
- Teepak International is acquired.
- The Teepak assets are sold.
“Bangers and Panache,” Director, November 1995, p. 104.
Buxton, James, “Devro Shares Slip on Warning as Hot Dog Sales Slide,” Financial Times, November 27, 1998, p. 24.
Cunningham, Sara, “Beauty Is Skin Deep for Devro’s Chief,” Times, February 15, 1997, p. 29.
“Devro-Teepak Has Meat Casings Industry All Wrapped Up,” Food Trade Review, November 2000, p. 747.
Turpin, Andrew, “At Full Strength,” Director, November 1997, p. 118.