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PalEx Goes Global
PalEx Goes Global : PalEx to merge with German reusable container company IFCO in a move that has far reaching consequences.

By Staff Writer
Date Posted: 5/1/1999

In a move that caught many pallet people by surprise, PalEx and International Food Container Organization (IFCO) plan to merge into a new business to be called IFCO Systems. IFCO Systems will be a marriage of a German-based company that owns and operates the largest food container pool in Europe — and has a foothold in the U.S. market — and the largest supplier of new pallets, recycled pallets and reconditioned drums in North America.

Christoph Schoeller, a founder and managing director of IFCO, will be chairman of the combined $550 million company. Martin Schoeller will serve as chief executive officer. PalEx chief executive officer Vance Maultsby will be executive vice president of the new IFCO Systems.

The merger may signal a slow-down of PalEx’s aggressive strategy of acquiring pallet and drum businesses, which helped it grow almost four-fold over the last two years. PalEx has 71 facilities in 23 states and seven Canadian provinces. The new entity will concentrate on greater internal growth, a broader unit-load product mix and more profitable service-related activities, especially from the rental of reusable produce containers (RPCs) -- the growth model already being followed by IFCO. The merger should be a boost both to PalEx’s income and stock prices — both have been down — and to IFCO’s efforts to market its patented returnable plastic containers in North America.

RPCs, the heart of IFCO’s existing business, are plastic boxes that are used to ship and merchandise fresh produce, replacing corrugated containers and other packages. RPC providers say that reusables help retailers to increase profits. The containers facilitate quicker cooling of many produce items, promote longer shelf life, and also enhance product protection. They reduce labor at the retail level because stock may be displayed right out of the RPC rather than in bulk displays, reducing the need for stocking labor. Waste reduction is another benefit.

Like pallet rental, an RPC system or network requires a significant infrastructure in terms of pallet or container investment, depots, container sanitation equipment and data management systems. Barriers to entry are high in the food industry pallet and container rental business, but because of this situation, they should result in better profitability as the market matures. The barriers to entry are much more formidable than in other PalEx businesses, such as pallet manufacturing and recycling.

IFCO was founded in 1992. It supplies about 50 million collapsible, reusable plastic containers to approximately 15,000 supermarket outlets in 15 European countries. Through its container leasing business with 91 depots strategically located across Europe, it also provides retrieval services, washing, and return to customers. IFCO’s European revenues have soared from 10 million in German currency in 1993 to 200 million in 1998, or about $120 million U.S.

IFCO’s main U.S. customer so far has been Wal-Mart, which has pioneered the RPC concept in America. Earlier this year, Ken Rogers, IFCO-U.S. president, said that all 70 Wal-Mart "superstores" were in the process of being set up for RPCs. (Ken described IFCO-U.S. as a joint venture between Intertape Polymer Group and Schoeller, a partner in other IFCO operations worldwide; Intertape Polymer’s place in the new entity is not immediately known.)

"We already have a presence in North America, but frankly, it is quite limited," Christoph said. Current IFCO-U.S. volume is around 400,000 crates per month. The merger, however, should allow the new company to significantly accelerate the North American roll-out of its RPC program with the help of existing PalEx sales and operations networks. "We gain the opportunity to co-locate our crate washing facilities with current or future PalEx sites," added Christoph. "In short, PalEx’s broad presence in North America will allow IFCO to accelerate its roll-out."

Pallet rental in North America and Europe are also options that IFCO Systems will be evaluating. With over 5,000 grower customers using IFCO crates, Vance acknowledged the potential for pallet rental, too. "We see a fertile field there for expansion," he said. "There are parts of the infrastructure already available in Europe. It’s just a matter of allocation of resources when we take a look at that."

The merger could spur wide-scale implementation of RPCs in the U.S., according to a logistics consultant with substantial experience in returnable packaging and environmental logistics. "The IFCO Systems merger is an extremely strong signal to the market," said Michael McCartney of QLM Consulting, a California-based consulting firm, which has worked closely with clients in the emerging RPC market the past few years. "The baby’s out of the bath water now."

With Perstorp Plastic Systems having been purchased recently by Belgium-based Industrial Kapital, Chep pursuing the market vigorously, and now the new IFCO Systems merger bolstering the market-leading IFCO program, Mike sees some heavy hitters establishing positions in the U.S. RPC scene. A more solidly financed IFCO combined with PalEx’s network will be a huge catalyst to the RPC market, he believes — one where all of the major RPC entrants could end up winners.

IFCO and PalEx have taken substantially different paths to success until this point. IFCO’s growth has been internally driven through the growth of its RPC program. PalEx, on the other hand, expanded rapidly in North America during its first two years through an aggressive acquisition program.

Under the merger agreement, outstanding shares of PalEx common stock will be exchanged for common stock of IFCO Systems and will represent 32-35% of the new company. The Schoeller family of Germany, through Schoeller Packaging Systems, will own 55% of the new company; their investors, including Mitsubishi in Asia — will own the rest. General Electric, a major investor in IFCO in Europe, will own a note convertible to IFCO Systems shares.

IFCO, which is privately held, will conduct an initial public offering in Europe in conjunction with the merger; the offering and merger are scheduled to be completed in the second or third quarter, when PalEx stock will no longer be traded.

PalEx stock was trading above $13 in April 1998 but had declined to $7 when the merger and most recent earnings results were announced at the end of March. PalEx revenues increased 43% from 1997 to $319.7 million in 1998, but net income declined from $6.6 million to $4 million and per-share earnings declined from 42 cents to 21 cents. The earnings decline has been attributed to the decision by PalEx to sever its relationship with Chep, for whom it manufactured and recycled pallets; the restructuring that resulted cost PalEx $3.6 million.

IFCO Systems will have joint head offices in Houston, Tex., and Munich, Germany. The PalEx management team will oversee the U.S. operations of IFCO Systems, according to PalEx chairman Sam Humphreys, who will become an IFCO Systems director along with John Drury, a fellow PalEx board member and chief executive officer of Waste Management.

"This merger will enable PalEx to participate in the dramatic growth opportunities presented by the global supply chain support market," said Vance. "By integrating innovative logistics with high quality returnable platforms and containers, we can increase the efficiency and reduce the cost of our customers’ retail and industrial distribution activities." According to Sam, the market for IFCO containers is about $16 billion worldwide.

"We are excited about this merger," said Christoph. "It makes good strategic sense for both companies. Our supply chain support system is proven in Europe and is experiencing strong growth. PalEx provides the logistical infrastructure for expanding that system in North America. The new company will have the expertise to extend the combined model worldwide and to expand our returnable packaging and services offerings. We intend to link our international operations into a global network, providing environmentally-friendly supply chain solutions."

"We will continue to make strategic acquisitions in the U.S. and around the world but this combined business model would be expected to grow much faster internally than ours has, historically," Sam said. "The acquisitions we make will be strategic to enhance our internal growth as we continue to build this (internal growth driven) business model. There will be a pairing of these philosophies going forward."

Reaction from the pallet industry was mixed. Some felt the merger would mark an end to PalEx’s acquisition phase. There is not a significant advantage to consolidating pallet plants, they suggested, other than servicing national accounts. They see few gains in terms of lumber, nail or machinery purchases accruing to a national account versus an independent, although they acknowledge that the ability to secure and service "national" sales accounts — while still elusive — may continue to grow in importance over the next decade.

As for the emerging U.S. RPC market, which will be very important to the success of the new company, Mike cautioned that a few key hurdles remain. An RPC system must be open before it will achieve the cost savings necessary to trigger mass acceptance rather than simply incremental growth, he contends. This involves interchangeability of RPCs from various vendors, inter-stackability, and tracking and tracing. Vendors should compete on factors such as quality, service or price, he suggested, but that there must be a synergy among the competing products that optimizes the whole of produce distribution. Nonetheless, he was optimistic about the future of RPCs.

The early success of RPCs in North America is far from clear, but strong interest in the concept indicates that it will be a force to be reckoned with. For example, at a panel discussion of produce shippers at the United99 produce conference recently, shippers were concerned about having to absorb the costs of retrofitting packing equipment to handle RPCs. RPC rental companies are working hard to overcome these barriers, however. Recently IFCO, Chep and others formed a nonprofit coalition that will — among other activities — lobby for produce shipper tax credits to cover packing line retrofits to handle RPCs.

PalEx has merged for the right reasons. It is broadening its horizons into more profitable, better defended businesses such as RPC rental and is merging with logistics and plastic container expertise that significantly expands its capabilities to provide a broad spectrum of "supply chain support services." Acknowledging that the IFCO RPC system is still early in its North American roll-out, however, PalEx’s existing facilities and existing core businesses will continue to play a key role in contributing to the bottom line for years to come.








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