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PalEx (IFCO Systems) Makes Significant Announcements
IFCO on the Go: IFCO Systems decides to divest its $175 million pallet manufacturing operations and also adds several important pallet recycling company acquisitions.

By Dr. Ed Brindley
Date Posted: 10/1/2000

The rumor mill has abounded with claims concerning PalEx (IFCO Systems). Recently IFCO has made a number of significant announcements concerning its acquisitions and expected sale. Highlights include the anticipated sale of its U.S. pallet manufacturing division and the purchase of over $100 million worth of pallet recycling business from three of the leading recycling networks in our industry.

Selling $175 Million in
Pallet Manufacturing Revenue

Late in August, IFCO made what has to be one of the most significant announcements ever made in the pallet industry. It plans to sell its U.S. pallet manufacturing division, which consists of 17 pallet manufacturing facilities. This move is being made to allow it to focus its efforts and resources on its core logistical systems and services businesses.

While this will probably have very little direct impact on the pallet manufacturing business, its implications are wide spread. After acquiring PalEx earlier this year, IFCO undertook a review of its North American operations and network in order to assess how to more closely align its network with the company’s goal of being a world leader in logistics systems and services that are based on round trip carriers and e-logistics. Divesting of its pallet manufacturing operations will allow company management to focus its efforts on the exciting and challenging opportunities in pallet and container management, services, and rental.

IFCO plans to reinvest the proceeds from the sale of its $175 million annual revenue business in pallet manufacturing into its more rapidly growing opportunities. It is particularly important to IFCO that it have a close strategic relationship with whomever buys its network of 17 pallet manufacturing plants.

This sale is expected to take place no later than the first half of 2001 to a single buyer. IFCO is considering its options and already has some possibilities under consideration. This includes the possibility that one or more players from within the pallet community might form together to buy these pallet manufacturing facilities. IFCO’s manufacturing locations are well established, respected, quality conscious manufacturers of wooden pallets and containers. Most of them are concentrated across the Southern half of the country, but they reach as far up the East Coast as Maine and into the Midwestern part of the U.S. These operations generate operating cash flows equal to 8-10% of revenue.

IFCO has retained Batchelder and Partners, Inc. to assist it with the divestiture of the operations. Batchelder, a financial advisory and consulting firm specializing in mergers, acquisitions, and strategic advice, has begun preliminary discussions with potential acquirers.

Meaning to the Pallet
Manufacturing Industry

Has PalEx left its first love? PalEx was formed just a few years ago by three companies with a combined revenue of about $100 million, mostly in pallet manufacturing. A little over two years ago after adding significantly to its original pallet manufacturing base, PalEx separated itself from its largest customer Chep, a move that was viewed as positive by many pallet people.

PalEx began with about $100 million in sales, added a major division in drum and industrial container refabrication of approximately another $100 million in sales, and bought a number of pallet manufacturing and recycling companies. PalEx expanded into Canada when it purchased Superior Pallet, the major supplier of rented CPC pallets in the Canadian CPC grocery pool.

Its growing interest in recycling, rental, and management services was obvious to any serious observer. To provide the kind of logistics services needed by companies that have nationwide and even worldwide requirements requires a significant infrastructure of repair, recycling, and sortation depots. It makes more sense for PalEx to expand in this direction than in pallet manufacturing. Manufacturing is more mature, and the logistics and container management business offers a greater potential for both growth and profits. Manufacturing margins are lower and it requires more intense machinery investments.

Many of the early leaders from the manufacturing industry moved out of PalEx’s top leadership positions after the first few years. Leadership responsibilities have continually moved more toward people from other areas, such as drum refabrication, logistics, container rental, and third party management. Recently IFCO has hired some past Chep management people to shore up its European base from IFCO’s container rental history.

When IFCO purchased PalEx in 2000, none of the very top management positions were held by people who came from wooden pallet manufacturing. The move is toward returnable plastic containers for the produce industry, as well as the need for more involvement in pallet and container sortation, recycling, and repairing. Vance Maultsby, CFO of IFCO, said that IFCO wants to maintain a strong strategic relationship with the company that buys its pallet manufacturing locations. He has even stated that having the right kind of a relationship will be a major consideration in the sale. In a sense IFCO has left its pallet manufacturing heritage, but pallets continue to be a very important part of the IFCO equation. It can buy the pallets it needs without actually owning its needed pallet manufacturing capacity.

A more important point is what this means about public ownership of pallet manufacturing plants. According to IFCO, on a constant or functional currency basis, pro forma revenue grew 10% in the first half of 2000 over the comparable period in 1999 to $188.2 million. Pallet services and systems grew 15% to $60.2 million. RPC Systems, which historically experience larger growth in the second half of the year (the European harvesting season), grew 11% to $74.5 million. While wooden pallet manufacturing operations generate operating cash flow equal to 8-10% of revenue, pallet manufacturing profits are simply not as attractive as those in the service related unit-load logistics business.

Vance stated that some businesses lend themselves well to public ownership and others fit the privately owned arena better. It turns out that pallet manufacturing seems to be one of those that better fits the privately held, entrepreneurial mold. Certainly, several efforts in the 1990s toward networking pallet companies together either failed or are continuing to struggle. The key element to future success appears to be services and management of pallets and containers.

It seems likely that IFCO will move some time into the U.S. with a rental pallet pool and will need a steady supply of high quality pallets. It can purchase these high quality pallets, much like Chep does now. It is more difficult to purchase well run pallet depot and recycling functions.

At the very least, pallet manufacturers will continue to be an important support service to the changing landscape of pallet and container management. Pallet manufacturing may experience even thinner margins, making it less attractive to public ownership. But when integrating manufacturing with pallet recycling and management services, more potential future public efforts might arise.

New IFCO Acquisitions

Late this summer IFCO went on an acquisition spree to purchase pallet recycling companies in an effort to complete much of its network across the Southern tier of states. It purchased Bromley Pallet Recyclers and Texas Pallet, the two largest pallet recycling companies in North America behind IFCO itself. It also purchased three recycling operations in the Southwest and Belfer Drum in Grand Rapids, Mich.

Texas Pallet, headquartered in Houston, Tex., has 11 facilities in Texas, Oklahoma, Mississippi, Louisiana, Tennessee, Alabama, and Ohio. Bromley, headquartered in Tampa, Fla., has 15 facilities in Florida, Georgia, South Carolina, North Carolina, Arkansas, Indiana, Illinois, Ohio and Tennessee. Its earliest acquisition was the three plants – Arizona Pallet in Phoenix, Pallet Express in Las Vegas, and PalWest in Denver. Combined these recyclers added over $100 million worth of pallet recycling to the growing IFCO recycling network. This added 29 more pallet and container service centers to the IFCO system.

These steps constitute a strategic move to establish a network to service IFCO’s pallet and RPC accounts. To provide nationwide service, including pallet and container rentals, a service network is a critical element. Rental of RPCs to the produce industry will require a solid depot network across the southern and western tiers of states.

IFCO is the largest supplier of drum refabrication services. So, its purchase of Belfer Drum in Grand Rapids, Mich. is a move to strengthen the company’s central region. Belfer is one of two drum reconditioners in the U.S. to hold an ISO 9002 certification. According to IFCO, the 70 plus year old company is well known within the industry as a high quality reconditioner of steel drums.

IFCO Pallet Manufacturing Plants for Sale

Location                                    Former Name

Bartow, FL................................Ridge Pallet

Hazlehurst, GA........................Ridge Pallet

Smarr, GA.................................Ridge Pallet

Mocksville, NC.......................Sheffield Lumber

Siler City, NC..........................Sheffield Lumber

Burner, NC..............................Southern Pallet

Livermore Falls, ME..............Isaacson Lumber

Shipshewana, IN....................Shipshewana Pallet

Waterloo, WI.........................Duckert Pallet

Black Water Falls, WI..........Duckert Pallet

New London, WI.................New London Pallet

New Boston, TX..................Fraser Industries

Amarillo, TX.........................Fraser Industries

St. Francisville, LA..............New startup

Yuma, AZ..............................Sonoma Pacific

Sonoma, CA.........................Sonoma Pacific

Salinas, CA..........................Sonoma Pacific








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