Gaylord Container Corporation
Gaylord Container Corporation
500 Lake Cook Rd.
Deerfield, Illinois 60015-5269
Fax: (708) 405-5505
Sales: $722.8 million
Stock Exchanges: American
SICs: 2653 Corrugated & Solid Fiber Boxes; 2631 Paperboard Mills; 2621 Paper Mills; 2674 Uncoated Paper & Multiwall Bags; 2819 Industrial Inorganic Chemicals, Nec; 2869 Industrial Organic Chemicals, Nec
Gaylord Container Corporation is a major national manufacturer and distributor of corrugated containers, containerboard, unbleached kraft paper, multiwall bags, grocery bags and sacks, and specialty chemicals. By the 1990s the company served more than 3,000 customers through a network of three paper mills, 24 converting plants, one graphics plant, and marketing operations throughout the United States. An aggressive strategy of expansion in the late 1980s was followed by an unexpectedly long cyclical low in the early 1990s, reducing profits and mandating financial reorganization. After completing a prepackaged bankruptcy agreement with bondholders in November of 1992, Gaylord refinanced debts and emerged from bankruptcy in a stronger position. With a new capital structure, it entered the 1990s shaken but hopeful.
Gaylord dates back to the aggressive buying strategies of a group headed by Marvin Pomerantz and Warren Hayford in the mid-1980s. The two partners were best known as Chicago veterans of International Harvester Co. (later named Navistar International Corp.), where Hayford served as president and Pomerantz as executive vice-president during the tumultuous late 1970s and 1980s. From 1983 to 1985, the paper industry was in a slump, with a key product, 42-pound linerboard, priced as low as $260 a ton (down from $350) and mills operating at 90 percent of capacity, a depressed rate for an industry run on extremely narrow margins. Pomerantz and Hayford took advantage of paper facilities available at bargain prices.
In December of 1985, the team of Pomerantz and Hayford started Mid-America Packaging, Inc., by acquiring an unbleached kraft paper mill and a multiwall bag manufacturing facility owned by Weyerhaeuser Company for $28 million, 20 percent of which was their own money. The rest was financed through a consortium of banks. Gaylord Container Corporation, in turn, acquired its business on November 17, 1986, from Crown Zellerbach Corporation for approximately $260 million. The transaction included three containerboard and unbleached kraft paper mills, 14 corrugated container plants, three corrugated sheet plants, a specialty chemicals facility and a cogeneration facility. While Gaylord and Mid-America were affiliated by common ownership after November 17, 1986, they merged on June 1, 1988, with Gaylord as the surviving corporation.
The merger marked yet another collaboration between Pomerantz and Hayford, whose careers had crossed before in the bag industry. Pomerantz had been virtually born into the business. As the son of Polish immigrants in Des Moines, he helped his father generate income during the depression by collecting used cotton and burlap bags for recycling. After World War II, the family business turned to paper bags. In 1961 Pomerantz founded Great Plains Bag Co., which was acquired by Continental Can Co. (renamed Continental Group, Inc.) in the early 1970s to become the largest brown bag company in the world.
During a stint at Continental, Pomerantz met Hayford, a senior executive who had been instrumental in the Great Plains acquisition. In 1979 Hayford left to become president of Harvester, where Pomerantz joined a year later as top lieutenant. But heavy equipment manufacturing proved less than permanent for the pair, who left by 1982. Pomerantz served on the board of directors for the Stone Container Corporation, still the industry leader in paper and paperboard production. Hayford served a short term as president of GenCorp Inc., formerly General Tire Corp. By the mid-1980s, however, the two realigned their interests to establish Gaylord Container Corporation.
After Gaylord was incorporated in 1986, its management pushed for rapid growth and new capital investment in an otherwise lagging industry. “Since we acquired Gaylord in 1986,” Pomerantz was quoted as saying in a 1988 Chicago Tribune article, “we have made substantial investments in our plants to increase productive capacity and improve both quality and cost effectiveness.” Gaylord already ranked as the number nine containerboard company, with 4 percent of the U.S. market. An August 29, 1988, article in Grain’s Chicago Business projected that the newly public company would approach sales of $800 million by 1989, making it an immediate entry on the Fortune 500.
A sustained positive outlook depended in large part on the U.S. economy. Since many products were shipped in corrugated boxes, their demand rose and fell with industrial production. The packaging industry was also affected by the value of the dollar, influencing import competition by its relative strength. For company optimists, prospects in late 1988 looked good, barring a recession in the following year or a rapid run-up in the value of the dollar.
Pomerantz and Hayford proved to be such optimists, emphasizing capital investment at a rate that reflected hope for the future.
“Pomerantz is a high-stakes roller,” commented Gary Palmero, an analyst at Oppenheimer & Co. “He’ll look like a genius if the market stays strong. Our company isn’t forecasting a recession for next year, so it seems to me that Gaylord is taking a good gamble at this point.” The gamble consisted, in part, of $300 million in spending over the three-year period beginning in September of 1988. The capital investment program included a layout of approximately $175 million to construct a new linerboard machine at the Bogalusa, Louisiana, plant, boosting capacity by 50 percent; approximately $65 million to rebuild and modernize the linerboard machine at the West mill in Antioch, California; and nearly $60 million to expand and enhance manufacturing capabilities at existing converting facilities. The company also invested roughly $120 million to maintain and upgrade existing equipment during the same three-year period. In addition, Gaylord acquired four plants and related inventories of the container products division of Fibreboard Corporation for approximately $156 million in March of 1988. One exception to the overall pattern of acquisitions was the November 1988 sale of its Baltimore, Ohio, paper mill to the principals of Somerset Capital Corp. of Boston for about $16.7 million.
Despite Gaylord’s active investment in its future, Wall Street showed signs of uncertainty. Having planned its initial public offering for the spring of 1988 at a price of $28, the company faced a soft market and finally offered 4.4 million shares of common stock at $20.50 a share on July 7th. By August of that year, the shares had fallen below $17, reflecting anxiety over the company’s debt—amounting to 75 percent of capital—and the cyclical nature of the paper industry, according to H. Lee Murphy in Crain’s Chicago Business.
Nevertheless, capital investment and growth continued well into 1989. In March of that year, Gaylord agreed in principle to form a joint venture with Central National Gottesman Inc. to market Gaylord’s containerboard and other paper products in overseas markets. By May, Gaylord and Gottesman each assumed a 50 percent interest in Gaylord Central National, Inc. (GNC), the primary agent for export sales, which amounted to 4 percent of net sales by 1992. In September of 1989 Gaylord’s Mid-America Packaging Division acquired U.S. Gypsum’s multi-wall bag manufacturing facility in Oakmont, Pennsylvania.
In May of 1989 the company entered the grocery bag business by buying a New York-based grocery bag and sack converting facility from Stone Container Corp. The facility was operated as a joint venture, Gaylord Bag Partnership (GBP), controlled by a Gaylord subsidiary and a corporation led by two bag businessmen, Joel Buser and Sam Posner. Gaylord—which produced approximately 200,000 tons of grocery bag and sack paper at its mills in Pine Bluff, Arkansas, and Bogalusa, Louisiana—supplied the paper needs of the converting venture. In June of 1992, Gaylord acquired all remaining interest in GBP, the partnership was dissolved, and GBP operations were integrated with those of the corporation. In December of 1989, the company acquired from Boise Cascade Corporation corrugated container plants in Marion, Ohio, and Torrance, California, for approximately $17 million. And in February of 1991, Gaylord acquired a 50 percent interest in Bay Sheets, Inc., a producer of corrugated sheets.
Responding to concerns of customers and to newly enforced government regulations, Gaylord focused increasing attention on environmental matters as it entered the 1990s. According to its 1992 annual report, the company made capital expenditures of approximately $2.5 million, $1.2 million, and $4.0 million in fiscal 1992, 1991, and 1990 respectively for environmental purposes. The $65 million paper machine rebuild at the Antioch mill, enabled it to use recycled fibers in new ways. “We can use more of a blend of fibers, such as base sheet and top sheet of 100 percent virgin fibers, and a 100 percent recycled sheet in the middle; or we can use a mix of 65 percent recycled and 35 percent virgin; or almost any other combination,” explained Pomerantz in a 1990 American Papermaker article. The company introduced ENCORliner and ENCORpack linerboard and packaging trademarks featuring 100 percent recycled fiber content, high quality and superior strength.
By 1992 Gaylord had the capacity to recycle nearly 1,750 tons per day of old corrugated containers and corrugated container plant clippings. Additionally, in order to curtail excess packaging, Gaylord developed a high-performance linerboard called Performance Specified Liner (PSL). PSL possessed essentially the same performance characteristics as standard linerboard, but with appreciably lower basis weight and, therefore, less material to end up as potential solid waste. The company’s efforts in developing PSL marked important steps toward environmental awareness that would characterize the 1990s and beyond.
By 1991 worsening losses and increased debt forced Gaylord to assess its options for survival. Beginning in the fall of 1989, operations were adversely affected by such factors as a substantial decline in the selling prices for Gaylord products and an increase in the cost of raw materials, particularly wood chips on the West Coast. Wood chip costs at the East mill increased by 65 percent from the fourth quarter of 1988 to the first quarter of 1991, when the mill was idled. Gaylord’s earnings before interest, taxes, depreciation, and amortization declined from approximately $166 million in fiscal 1989 to approximately $92 million and $81 million in 1992 and 1991, respectively. In addition to reduced earnings, the company was seeking to get out from under a crushing 1991 debt of $807 million, of which $181 million was bank debt.
Debt-rating agencies were quick to target the faltering corporation. Standard & Poor’s downgraded its rating on Gaylord’s subordinated debt to triple-C from B-, affecting approximately $400 million in notes. Similarly, Moody’s Investors Service Inc. lowered Gaylord’s rating on two junk bond issues and projected that Gaylord’s fiscal loss in 1991 would exceed the loss of $23.2 million on sales of $718.3 million in 1990. Over the course of the year, Gaylord reduced operating expenses and capital expenditures by cutting work force levels, reducing selling and administrative expenses, deferring nonessential maintenance expenditures, and postponing select capital expenditures.
Many analysts attributed Gaylord’s problems to the East mill acquisition. Sherman Chao, a senior forest product and paper industry analyst for Salomon Bros. Inc., claimed in Crain’s Chicago Business, “Gaylord probably tackled more than they should have.” Gaylord officials defended their strategy by emphasizing the cyclical nature of the paper product business and the tendency of companies to invest at the bottom of the cycle. This cycle was particularly long, however, and was aggravated by unusually low product prices and rising costs of raw material.
Whatever the causes, Gaylord faced an untenable debt that initiated a series of refinancing plans. Beginning on May 15, 1991, the corporation suspended payment of interest on its subordinated debt, pending development of a comprehensive plan to reduce debt and debt service requirements while ongoing business operations continued. By September 11, 1992, $134.5 million of accrued but unpaid interest on subordinated debt had accumulated. Beginning in June of 1991, the corporation also suspended payment of principal under its bank credit agreement. Certain holders of subordinated notes formed an unofficial bondholder committee that negotiated with Gaylord to arrive at viable debt restructuring plans. In August of 1991, the Corporation offered bondholders three choices in what the Junk Bond Reporter called “a Chinese menu” approach to the company’s $570 million debt. Bondholders could choose between a new bond worth 44.5 cents on the dollar and a 14 percent coupon and 22 shares of common stock for each bond; a bond worth par and a 4.25 percent coupon and 18 shares of stock; or 53.3 cents in cash. The final solution, however, turned out somewhat differently.
A financial restructuring plan was developed wherein the Gaylord’s subordinated debt securities were exchanged for new senior subordinated debt securities featuring lower principal payment requirements and lower annual interest expense. Namely, holders of $528.8 million of subordinated debt received almost $367.8 million in new senior subordinated securities, six million shares of Gaylord Class A common stock, and 31.8 million redeemable exchangeable warrants for Class A shares. The six million shares of stock and warrants totaled 72 percent of the company’s equity.
In July of 1992 the U.S. Securities and Exchange Commission declared effective the terms of the proposed exchange, and the company began soliciting the approval of its bondholders, banks, and equity holders to complete the restructuring through the filing of a pre-approved plan with the U.S. Bankruptcy Court. After majority approval, the prepackaged plan was filed on September 11th and confirmed by the court on October 16th. On November 2, 1992, Gaylord consummated its restructuring and emerged from bankruptcy. “They’ve done a nice job restructuring and their long term prospects look good,” noted Oren Cohen of Salomon Brothers in the October 26, 1992, volume of Investment Dealers’ Digest. “As bankruptcies go, Gaylord’s went relatively smoothly,” according to Brian Bogart of Duff & Phelps Corp. in Crain’s Chicago Business.
The complicated restructuring package reduced total debt to about $621 million from $827 million and reduced annual interest expenses by $38 million. Nevertheless, Gaylord was not fully at ease by 1993. Its debt-to-capital ratio stood at approximately 83 percent. After its first quarter, ending December 31, 1992, the company recorded an operating loss of $1.6 million, compared with operating earnings of $4.8 million for the same period of the previous year. Nor had paperboard and other paper product prices rebounded, as the industry remained stuck in the fifth year of a down cycle.
Yet the 1993 Standard & Poor’s industry survey projected a much stronger economy in 1993, with rising prices and earnings for paper companies. The survey also emphasized the high efficiency, high yield potential of new mills and machines developed during the down cycle. Even without large price increases, Standard & Poor’s forecasted impressive gains in earnings as capital investments would begin to pay off. In Gaylord’s 1992 annual report, Pomerantz remarked that 1993 would be marked by “uncertainty around the timing of an economic recovery and pricing for our products. … Our return to profitability is directly tied to our ability to realize higher prices for our products.”
In June of 1993, Gaylord used proceeds from a successful $525 million offering mainly to redeem other debt and prepay $70 million of its bank borrowings, according to company spokesperson Kathryn Chieger, cited in The Bond Buyer. Chieger explained that the company was “taking advantage of what we believe are favorable market conditions to do a refinancing.” Waiting for those favorable conditions to yield higher prices for its products, Gaylord was poised to exchange the financial box into which it had fallen for the corrugated boxes that were its specialty.
Gaylord Container Corporation Mid-America Packaging Division.
“Gaylord Container Acquires Multi-Wall Bag Plant from United Sates Gypsum,” PR Newswire, September 6, 1989.
Gaylord Container Corporation annual reports, Deerfield, IL: Gaylord Container Corp., 1988–92.
“Gaylord Container Enters Grocery Bag and Sack Business,” PR Newswire, May 17, 1989.
“Gaylord Container Extends Recycling Abilities at Antioch,” American Papermaker, vol. 53, no. 8, p. 23.
“Gaylord Reports First Quarter Fiscal 1993 Results,” PR Newswire, January 27, 1993.
“Gaylord’s Three Choices Regarded as Creative,” Junk Bond Reporter, vol. 1, no. 28, p. 1.
Klein, Elizabeth, “Beleaguered Gaylord Eyeing Refinancing,” Crain’s Chicago Business, February 25, 1991, p. 36.
Murphy, H. Lee, “How Gaylord Found Growth in Big Packages,” Crain’s Chicago Business, August 29, 1988, p. 3;
“Price Hike May Hold Key to Gaylord Uptick,” Crain’s Chicago Business, March 1, 1993, p. 34.
O’Donnell, Kathie, “Gaylord’s Plans for $525 Million Deal to Redeem Debt Sends Its Junk Higher,” The Bond Buyer, March 26, 1993, p. 3.
Zuckerman, Gregory, “Upbeat Future Predicted for Gaylord,” Investment Dealer’s Digest, vol 5., no. 43, p. 3.