Chesapeake seeks supervised sale

Dec 31, 2008 (Richmond Times-Dispatch - McClatchy-Tribune Information Services via COMTEX) -- CSKE | Quote | Chart | News | PowerRating -- Chesapeake Corp. is seeking to save its global packaging businesses by selling them through a plan supervised by a bankruptcy court, but the company might not survive as a Richmond-based firm.

The specialty packaging maker filed for Chapter 11 bankruptcy protection Monday in Richmond. The filing enables the 90-yearold company, saddled with a heavy debt load and facing difficult business conditions, to hold creditors at bay while it reorganizes its finances and proceeds with an auction of its assets.

Shareholders likely would get little or nothing out of the deal.

U.S. Bankruptcy Judge Frank J. Santoro yesterday approved the company's motion for $18.5 million in debtor-in-possession financing from a bank group led by Wachovia Corp. The financing, which could be enlarged to $37 million, will help the company keep its businesses functioning during Chapter 11 proceedings.

Chesapeake wants to complete a sale of its business units by March. The company already has a contract -- a so-called "stalking horse" agreement -- to sell substantially all of its assets to a group of investment firms for $485 million, unless another buyer emerges and offers a higher bid at auction.

Founded in Virginia in 1918, Chesapeake is based in Richmond and has an administrative staff here of about 25 people. Most of its manufacturing operations and 5,400 employees are overseas, especially in Europe, where its subsidiaries make paperboard and plastic packaging for health-care, food and beverage products. Its U.S. operations include plants in New York and North Carolina.

All of its business units are continuing to operate, the company said. Its non-U.S. subsidiaries are not part of the Chapter 11 filing.

The investment firms that have agreed to buy the company's assets, including New York-based Irving Place Capital Management LP and California-based Oaktree Capital Management LP, plan to maintain the businesses, Chesapeake said.

Chesapeake said part of the sale plan is for the investment firms to buy the outstanding capital stock or other equity securities of Chesapeake's foreign subsidiaries.

The sale would help the parent company pay off debts, including about $246 million in asset-secured bank loans.

"Basically by using the stalking horse tactic, they are putting in place a reserve price, so it doesn't go at a fire-sale price, and the creditors can recover as much as possible," said Tom Arnold, a finance professor at the University of Richmond.

However, the sale would leave the Richmond-based parent company as a shell company that would likely go out of business after the bankruptcy process, though the buyers could preserve the Chesapeake name in the businesses that are sold.

Chesapeake started in West Point and operated the paper mill there until 1997, when it sold the plant as part of a strategy to exit the commodity paper products business. In the late 1990s and early 2000s, the company bought several European-based firms in a bid to become a major player in high-value, specialty packaging for products such as confectionery and tobacco.

The company has struggled in recent years, however, and reported financial losses in its past three fiscal years. In bankruptcy filings, Chesapeake said its cash reserves had been "seriously depleted" by factors including the economic downturn and aggressive competition within the industry, which reduced its operating margins.

The company said it sought Chapter 11 protection because it could no longer support nearly $521 million in debt on borrowed money, which required annual interest expenses of more than $49 million.

The company reported total assets of $936.6 million and total debts of $937.1 million.

"After exploring a range of possible alternatives to improve our balance sheet and maintain the liquidity we need to operate our businesses in an extremely difficult economic environment, the management and board of directors of Chesapeake concluded that a court-supervised sale of our business operations is in the best interest of the company and its stakeholders," Andrew J. Kohut, the company's president and chief executive officer, said in a statement. Contact John Reid Blackwell at (804) 775-8123 or jblackwell@timesdispatch.com.

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