Two Years After Buyout, Keter Pinched by Debt and High Oil Prices

The Israeli maker of plastic products sold around the world faces a credit downgrade unless it can get its debt down

David Bachar

Two years after the European buyout fund BC Partners bought control of Keter Group, the Israeli company whose garden furniture and home storage solutions are used by millions around the world, the company’s record sales are being weighed down by a growing debt load and higher oil prices.

In January, Moody’s warned that Keter’s credit rating may be lowered.

When the acquisition was announced in 2016, the company and its new owners expressed confidence about the company’s future as a partnership with Keter’s founders, the Sagol family. The fund bought 80% of Keter in a deal that valued the company at $1.7 billion, leaving the Sagols with the rest.

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“We look forward to pursuing Sami Sagol’s ambitious growth strategy, fueled by investments in sales and marketing, product innovation, operational excellence and selective acquisitions,” said Jean-Baptiste Wautier, managing partner.

BC is a giant fund with 12 billion euros under management and 30 years’ experience buying and selling some 100 companies in deals totaling 100 billion euros ($113 billion at current exchange rates). But Israeli private equity fund managers contended even before the deal was closed in March 2017 that BC was overpaying.

Keter is a huge company by Israeli standards. It employs 4,500 people, 2,000 of them in Israel. It has factories and distribution centers in nine countries and boasts 25,000 points of sale for products that range from tool boxes to a “Magic Playhouse” for children.

All of its products are made from plastic, mainly polypropylene, which is derived from petroleum. BC gained control of Keter at a time when polypropylene prices were low and the company’s profits were higher because the price of global oil had plunged. Oil prices turned upward at the start of 2016 and by the next year they began eating into profits.

That came at the same time that BC saddled the company with a 700 million euro debt from a loan it took out from JPMorgan and UBS to finance the acquisition.

In addition, Keter itself was looking to expand as Wautier promised it would and made a series of acquisitions, such as buying Adams Manufacturing, a U.S.-based manufacturer of plastic garden furniture last August. As a result, Keter’s debt has grown to 1.1 billion euros.

In the 12 months through November 2018, Keter’s sales grew 2.2% to a record 1.2 billion euros. But, weighed down by higher costs for raw materials and interest rates, the company’s other metrics have not done as well. Earnings before interest, taxes, depreciation and amortization dropped 35% in the 12 months from the same time a year earlier. Operating margins sunk to 5.9% from 8.9%.

Keter carries a B3 rating, which already makes its debt speculative. But the company’s sagging performance caused the credit rating agency Moody’s to lower the company’s credit outlook to Negative from Stable two months go.

“The inability to improve operating performance, financial leverage and the liquidity situation over the next six months could result in further negative rating pressure, which is reflected in the negative outlook,” analyst Vitali Morgovski warned.

Morgovski said he remained concerned about Keter’s leveraging. At the end of 2018 he estimated Keter’s ratio of adjusted gross debt to EBITDA exceeded eight, up from just five in 2016.

“Free cash flow generation remained distinctly negative for the second year in a row and it remains in our view uncertain whether it will materially improve in 2019,” Morgovski said in his report.

Moody’s said it remained hopeful that restructuring measures and lower resin prices would help boost profitability over the next quarters. Among other things, Keter is increasingly using cheaper recycled plastic to offset the high cost of polypropylene. Last year recycled raw materials went into 38% of its products, up from 30% the year before.