“Insanely expensive” was the reaction of several private equity fund managers last week when asked about the price for which Keter Plastic was sold to the London-based private equity fund BC Partners.
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BC Partners agreed to buy control of Israel’s Keter Plastic two weeks ago. The price wasn’t revealed, but reports valued the company at between 6.5 billion and 7 billion shekels ($1.7 billion to $1.8 billion). The Sagols, the present owners, will retain 20% of the company.
The reason why so many eyebrows were raised among Israeli investors is that the price of the transaction reflects an exceptional profit multiple (the relation between the company’s profit and its value) for Keter.
Keter refuses to divulge data about its activity, but the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) for 2015 has a market estimate of $130 million. Even in the best case scenario, in which expectations for 2016 are fulfilled (and profits reache $170 million to $200 million), this will mean a profit multiple of 8.5 at best, which is not considered low in industrial firms.
The surprise regarding the price is greater in light of the fact that Keter works in a very competitive market, where it is difficult to maintain technological advantages and every new Keter Plastic product is reverse engineered (meaning competitors work to discover the technological and engineering principles behind the product) within a few months.
This ability to present good results with such basic consumer products highlights the company’s achievements. “Keter is very strong on simple and cheap merchandise, and caters to the standard, popular market,” says furniture importer Shlomo Carmi. “The template of their chairs, which cost 30 to 70 shekels [about $8 to $18], travels all over the world. They lease it out. After all, what’s expensive in the production of plastic chairs is creating the template – which costs about $1 million.”
The Israeli investors’ incredulous reactions is the reason the deal was offered primarily to international investment funds rather than Israelis, and why only foreign companies reached the final stage of the tender: BC Partners won out over a joint offer from CVC Capital Partners and the Goldman Sachs Investment Banking Division.
But what Israelis consider expensive is not necessarily so expensive in international terms, and anyone trying to understand how the Sagols earned almost 6 billion shekels has to understand the viewpoint of the foreign buyers. On the international front, these are the right years for selling companies, when low interest rates are causing cheap money to seek investment channels.
In addition, due to five years of low interest rates, investment funds like BC Partners aren’t afraid to use high leveraging for their acquisitions. The industry estimates that 50% of the purchase price will come from loans. Such leveraging guarantees the purchaser a very high return on equity capital, even without a dramatic improvement in Keter’s results. So the buyers only have to hope that there won’t be a change in international economic parameters.
In addition to low interest rates, the price of the principal raw material for the plastics industry – oil – has been at an unprecedented low in recent years. The low price is a central factor in the increase of tens of percentage points in Keter’s bottom line in recent times, and one reason for the price the company fetched. The buyers have to hope that the price of oil won’t soar in coming years.
Finally, a series of streamlining processes affecting all stages of Keter’s production in recent years have also contributed to the improvement in the company’s results.
But beyond the perfect timing, the price paid for Keter indicates that the foreign funds also consider Keter a company with exceptional qualities. Or, as the manager of an Israeli investment fund describes it, “Keter is spread out in an interesting way globally; it has good customers. It’s true that it’s in a field where, as soon as you have a new product, everyone imitates it. But each time it manages to come up with the products the customers want.”
‘Sami always knew what to produce’
Keter chief executive Sami Sagol, 74, originally dreamed of being a scientist. After serving as an officer in the Israel Air Force – where he met his wife, Tova – he studied chemical engineering at the Technion – Israel Institute of Technology in Haifa, and then decided to join his father’s small plastics plant in Jaffa for a couple of years.
But the short spell turned into a career. The small factory his father, Joseph, built when he immigrated from Turkey was one of a series of small plastics factories in Jaffa that manufactured items such as tubs and combs. At the time, Keter’s plastic innovations included napkin holders and special containers for pickled vegetables.
Over the years, the innovation promoted by Sami and his brother Itzhak led to expansion in order to increase production capacity. First they acquired neighboring factories in Jaffa, then larger factories throughout Israel, and, finally, worldwide acquisitions – so that Keter became the owner of the factories that had tried to copy its products years earlier.
Even when the Jaffa plant was producing very simple items and earning $3 million to $4 million a year, Sagol declared that he wanted to achieve exports of $100 million. That was a strange ambition for a factory whose raw materials at the time came from abroad, as did the machines and molds, and whose merchandise requires a lot of space, meaning high transportation costs.
In the 1970s, Keter’s factories in Jaffa already had computers on the production machines. By the late ’80s, the designing of the molds for the products was also computerized. And in the ’90s, the plant was one of the first to use internet communications among its machines worldwide.
“I’m not surprised that Keter reached this size. Sami is one of the greatest industrial strategists I’ve ever met,” says Dr. Amir Ziv-Av, who served as development director at Keter 30 years ago. “Everything he talked about in the late 1980s regarding the company came true.”
Ziv-Av says the secret of Keter’s success lies in its low production costs – to the point where it actually pays for the company to manufacture its products in the West (Israel, the United States and Europe). He uses the company’s familiar garden chair to illustrate the production chain: “Almost 70% of the direct production cost is the raw materials, whose cost is international. The next stage is investment in the machine and the mold, which reflects the capital investment. About 10% of production costs are the time it takes the machine to produce chairs – the machine costs $400,000 and produces a chair in 30 seconds. The mold for the chair costs $100,000, meaning you produce a million chairs at a cost of 10 cents per chair.
“The manpower cost is less than 1% of the production cost, since if someone stands next to a machine that produces a chair every 30 seconds, it doesn’t make much difference if he’s an Israeli – whose labor cost $10 an hour – or Chinese, even if he cost nothing. So the story is the sophistication of the manufacture," he adds.
“There’s also the optimization of sophisticated technology,” says Ziv-Av. “Designing a chair that’s placed on grass and doesn’t break when you lean on it can be more complicated than a bridge. It’s not easy to reduce the weight of the chair and the machine time for producing it. All these things have an impact.”
Secret of the plastic chair’s success
Keter’s growth to a sales turnover of 800 million euros ($900 million) in 2015 came from a series of products that we use almost unconsciously. Plastic baskets for shopping; garden furniture resembling wicker; furniture with a texture that resembles a knitted sofa – these all incorporate a lot of intellectual property, included in the price paid for Keter. Keter achieved this by copying and improving existing products and developing new ones. Before it was commonplace in Israel, the company regularly sent employees to exhibitions abroad. Sagol would return with plastic items and analyze them in the Israeli factories.
And, of course, there was the company’s most familiar product: the Keter chair. When research showed that only about 10,000 chairs a year were sold in Israel as garden furniture, Keter developed a table and chair from plastic that were unique in the relationship between their weight and strength. When a plastic table made in Germany weighed 40 kilograms (88 pounds), Keter manufactured a table that was significantly lighter and cheaper. Sagol was so confident in his invention that the company manufactured 100,000 chairs without knowing what kind of demand to expect. All the chairs were sold in the first year, along with about 20,000 of the tables.
The market was flooded with imitations in the second year. But Keter was ready, and sold over a million chairs in five years in Israel alone.
Despite its success in Europe and North America, there are many markets – mainly in Asia – where Keter doesn’t have much of a presence. Sagol, who dreams of a company with sales reaching $5 billion, realized that in order to increase the growth rate, Keter needed an owner with global abilities, like BC Partners.
In light of the fact that Keter’s success has been linked to Sagol’s management abilities and those of other senior executives, there’s a question about the ability to maintain this growth, as well as questions about Keter’s Israeli employees.
Keter employs about 1,400 workers in Israel, and makes a point of hiring Arabs at its plants in the north. Although Sagol was always proud of the company’s commitment to its employees, it’s not clear if the new owner will continue activity in Israel.
“The buyers will appoint a foreign director, who probably won’t live here because the markets aren’t here,” says an investment manager. “The buyers will probably engage in acquisitions and mergers more aggressively. If they make proper acquisitions, they’ll grow. All companies are sold in the end – there’s no business model in which a family firm isn’t sold. Those models died 50 years ago. All companies change hands, and ultimately it’s a change that’s good for the companies and the workers. There’s no doubt that Sagol sold the company well.”