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Acquisition of Diversey Holdings, Inc.
 12 Months Ended
Dec. 31, 2011
Acquisition of Diversey Holdings, Inc. [Abstract]  
Acquisition of Diversey Holdings, Inc.

Note 3     Acquisition of Diversey Holdings, Inc.

Description of Transaction

On October 3, 2011, we completed the acquisition of 100% of the outstanding stock of Diversey. We acquired Diversey to position us to capture growth opportunities by developing end-to-end service-based solutions for the food processing and food service industries, to leverage combined research and development investments to develop broader growth initiatives in the food processing and food service industries and to improve access to under-developed markets and increase access to developing regions.

Under the terms of the acquisition agreement, we paid in aggregate $2.1 billion in cash consideration and an aggregate of approximately 31.7 million shares of Sealed Air common stock to the shareholders of Diversey. We financed the payment of the cash consideration and related fees and expenses through (a) borrowings under our new Credit Facility, (b) proceeds from our issuance of the Notes and (c) cash on hand. In connection with the acquisition, we also used our new borrowings and cash on hand to retire $1.6 billion of existing indebtedness of Diversey. The new Credit Facility and Notes are described further in Note 11, “Debt and Credit Facilities.”

 

SEALED AIR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

 

Consideration Transferred

The following table summarizes the consideration transferred at the acquisition date.

 

 

         

Cash

   $  2,098.7  

31.7 million shares of Sealed Air common stock (at October 3, 2011 average price of $16.18 per share)

     512.9  

Fair value of Diversey preferred stock investment(1)

     262.9  

Fair-value-based measure of the portion of the SARs attributed to pre-acquisition service(2)

     50.8  
   

 

 

  

Total consideration

   $ 2,925.3  
   

 

 

  

 

 

(1) On October 3, 2011, prior to the closing of the acquisition, we used cash on hand in the amount of $262.9 million to purchase preferred stock of Diversey (the “Preferred Stock Issuance”) and this amount has been included in the consideration transferred. Diversey elected to exercise its covenant defeasance option with respect to its 10.50% senior notes due 2020 (the “DHI Notes”), and Diversey, Inc., a subsidiary of Diversey, elected to exercise its covenant defeasance option with respect to its 8.25% senior notes due 2019 (the “DI Notes”). In addition, Diversey elected to redeem 35% of the aggregate accreted value of the DHI Notes using a portion of the proceeds of the Preferred Stock Issuance, and Diversey, Inc. elected to redeem 35% of the aggregate principal amount of the DI Notes using a portion of the proceeds of the Preferred Stock Issuance that had been contributed to the equity capital of Diversey, Inc. Each such redemption occurred on November 2, 2011 (the “Equity Claw Redemption Date”).

On the Equity Claw Redemption Date, 35% of the DHI Notes were redeemed at a price of 110.50% of their accreted value, plus accrued and unpaid interest to the Equity Claw Redemption Date. Additionally, 35% of the DI Notes were redeemed at a price of 108.25% of their principal amount, plus accrued and unpaid interest to the Equity Claw Redemption Date. Following the completion of these redemptions Diversey and Diversey, Inc. notified The Depository Trust Company and Wilmington Trust (the “Trustee”) that they would be redeeming the remaining 65% of the DHI Notes and the DI Notes pursuant to the make-whole redemption provisions of the indentures governing the DHI Notes and the DI Notes. Each such redemption occurred on December 2, 2011.

 

(2) In connection with the acquisition, Sealed Air exchanged Diversey’s cash-settled stock appreciation rights and stock options that were unvested as of May 31, 2011 and unexercised at October 3, 2011 into cash-settled stock appreciation rights based on Sealed Air common stock (“SARs”). The number of SARs was determined based on the ratio of the per share merger consideration value of $24.50 and the fair value of Sealed Air’s common stock on September 30, 2011 of $16.70, or an exchange fraction of 1.46722. This resulted in granting 13.0 million SARs.

The fair-value-based measure of the SARs at October 3, 2011 was $100.2 million based on the assumptions as of the closing date of the acquisition. The fair value of the SARs was calculated using a Black-Scholes valuation model with assumptions with respect to each of the following variables: closing stock price on October 3, 2011; forfeiture rates; risk-free interest rates; expected volatility and a dividend yield. We included the fair value of Diversey cash-settled stock appreciation rights and unvested stock options converted to SARs of $50.8 million in the consideration transferred for the acquisition that was related to services rendered prior to the acquisition.

Since these SARs are settled in cash, the amount of the related future expense will fluctuate based on the forfeiture activity and the changes in the assumptions used in the Black-Scholes valuation model which include Sealed Air’s stock price; risk-free interest rates; expected volatility and a dividend yield. In addition, once vested, the related expense will continue to fluctuate due to the changes in the assumptions used in the Black-Scholes valuation model for any SARs that are not exercised until their respective expiration dates, the last of which is currently in March 2021.

During the three months ended December 31, 2011, we recognized compensation expense of $19 million related to SARs. This expense was based on the assumptions mentioned above and is included in marketing, administrative and development expenses on our consolidated statements of operations. Payments due to the exercise of SARs in the three months ended December 31, 2011 were $22 million. As of December 31, 2011, the remaining liability for these SARs was $47 million.

In addition, in the three months ended December 31, 2011, we recognized compensation expense of $38 million for SARs, which was included in restructuring charges on our consolidated statements of operations for the termination and benefit costs related to the Diversey employees that were part of the 2011 – 2014 Integration & Optimization Program. Payments due to the exercise of these SARs were $28 million in the three months ended December 31, 2011. The remaining liability for SARs included in the restructuring plan was $12 million as of December 31, 2011.

 

SEALED AIR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

 

Fair Value Estimate of Assets Acquired and Liabilities Assumed

We are continuing our review of our fair value estimate of assets acquired and liabilities assumed during the measurement period, which will conclude as soon as we receive the information we are seeking about facts and circumstances that existed as of the acquisition date, or learn that more information is not available. This measurement period will not exceed one year from the acquisition date. At the effective date of the acquisition, the assets acquired and liabilities assumed are generally required to be measured at fair value.

Our fair value estimate of assets acquired and liabilities assumed is pending completion of several elements, including the finalization of an independent appraisal and valuations of fair value of the assets acquired and liabilities assumed and final review by our management. The primary areas that are not yet finalized relate to the fair value of receivables, net and payables, certain tangible assets acquired and liabilities assumed, the valuation of property and equipment, the valuation of intangible assets acquired, the valuation of the SARs, environmental and legal reserves, favorable or unfavorable contracts, operating leases or commitments, contingent liabilities and income and non-income based taxes, including the filing of pre-acquisition tax returns for Diversey. Accordingly, there could be material adjustments to our consolidated financial statements, including changes to our depreciation and amortization expense related to the valuation of property and equipment and intangible assets acquired and their respective useful lives among other adjustments.

Legacy Diversey is subject to legal and regulatory requirements, including but not limited to those related to environmental matters and taxation, in each of the jurisdictions in which it operates. We have conducted a preliminary assessment of the liabilities arising from these matters in each of these jurisdictions and have recognized provisional amounts in our initial accounting for the acquisition of Diversey for all identified liabilities. However, we are continuing our review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized.

The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquired and the liabilities assumed as of the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. The final determination of the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in these consolidated financial statements. Goodwill is not tax deductible.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

 

 

         

Net assets acquired (liabilities assumed):

        

Cash

   $ 109.3  

Restricted cash

     269.2  

Receivables, net

     592.7  

Inventories(1)

     308.1  

Current deferred tax assets(2)

     60.9  

Prepaid expenses and other current assets

     161.8  

Property and equipment, net(3)

     420.0  

Intangible assets(4)

     2,072.1  

Non-current deferred tax assets(2)

     62.9  

Other assets, net(5)

     178.7  

Short-term borrowings

     (55.0 ) 

Accounts payable

     (337.8 ) 

Other current liabilities

     (488.8 ) 

Long-term debt, less current portion

     (1,648.8 ) 

Non-current deferred tax liabilities(2)

     (619.4 ) 

Other liabilities(5)

     (443.2 ) 
   

 

 

  

Total net assets acquired

     642.7  

Goodwill

     2,282.6  
   

 

 

  

Total consideration

   $ 2,925.3  
   

 

 

  

 

SEALED AIR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

 

The following information provides further details about the estimated net step-up in fair value and/or the estimated fair value at the acquisition date for some key balance sheet items.

 

  (1) Inventories

 

 

         

Estimated net step-up in fair value

   $ 11.6  

Increase due to change from LIFO to FIFO

     5.5  
   

 

 

  

Total

  $ 17.1  
   

 

 

  

As of the effective date of the acquisition, inventory is required to be measured at fair value. Raw materials are valued at current replacement costs which approximate their carrying value. The preliminary fair values for finished goods inventory were determined based on estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of Sealed Air. The method used was the comparative sales method, which is based upon the expected selling price of a manufacturer’s finished goods inventory to customers.

 

  (2) Deferred taxes

In connection with the acquisition of Diversey, we acquired the stock of Diversey and therefore inherited the historical tax bases of its assets and liabilities, as well as its other tax attributes. As a result, we established deferred tax assets and liabilities with respect to the net step-up to fair value of assets and liabilities other than goodwill. We also inherited various tax uncertainties and valuation allowances, which were adjusted to reflect our judgments and estimates regarding the ultimate resolution of the items and consideration of the combined company activities including treatment of unremitted earnings of Diversey’s foreign subsidiaries. See Note 16, “Income Taxes,” for further information. Any adjustments to our estimate of assets acquired and liabilities assumed may result in a change to our deferred tax assets and liabilities.

The net deferred tax liability associated with the fair value of assets acquired and liabilities assumed was approximately $503 million. Diversey has significant unremitted foreign earnings, most of which are not permanently reinvested. As a result, as further described in Note 16, “Income Taxes,” a $94 million liability is included in non-current deferred tax liabilities. Also included in Diversey liabilities and as a reduction to certain deferred tax assets is $183 million for uncertain tax positions, as well as interest and penalties in addition to potential tax liabilities. In addition, we acquired from Diversey various deferred tax assets, including various accruals, such as pension and deferred compensation obligations that are not yet deductible, as well as, to a lesser extent, certain credits and foreign net operating losses, for which a valuation allowance was not needed. These amounts, net of valuation allowances, are included in deferred tax assets (current and non-current). See Note 16, “Income Taxes” for further discussion. Included in other current liabilities is a $54 million liability for income taxes payable and $8 million of current deferred tax liabilities.

 

  (3) Property and equipment

 

 

         
    Estimated
Net Step-up in
Fair Value		  

Land

   $ 53.2  

Buildings and building improvements

     0.8  

Machinery and equipment

     21.5  

Fixed assets — other

     12.4  
   

 

 

  

Total

   $ 87.9  
   

 

 

  

As of the effective date of the acquisition, property and equipment is required to be measured at fair value, unless those assets are classified as held-for-sale on the acquisition date. It is assumed that all property and equipment will be used and that all assets will be used in a manner that represents the highest and best use of those assets. The fair value can be estimated using a market approach (such as the sales comparison approach), an income approach (such as the income capitalization method) or a cost approach (such as replacement cost new method). As part of the appraisal process for real estate (land, buildings and building improvements), a reconciliation of all value indications was performed which resulted in the cost approach being the primary valuation methodology selected. For personal property (machinery and equipment and fixed assets – other) the cost approach was also the primary approach selected and the market and income approaches were also used, as applicable. Our fair value adjustment to property and equipment has been made by obtaining an understanding of the nature, amount and type of Diversey property and equipment as of October 3, 2011. The estimated net step-up in fair value is preliminary and subject to change as we confirm the physical existence and condition of certain property and equipment and finalize assumptions.

 

SEALED AIR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

 

 

 

  (4) Intangible assets

 

             
    Estimated
Fair Value		     Estimated
Weighted
Average
Useful Lives
(Years)

Customer relationships

   $ 1,007.6     13.0

Trademarks and trade names

     872.4     indefinite

Technology (1)

     159.6     8/indefinite

Contracts

     32.5     5.0
   

 

 

      

Total

   $ 2,072.1      
   

 

 

      

 

 

(1) Includes software of $84.0 million (3 year useful life), patents and trade secrets of $69.9 million (8 year weighted-average useful life), and in-process research and development (“IPR&D”) of $5.7 million. IPR&D is an indefinite-lived intangible asset.

It is assumed that all intangible assets will be used in a manner that represents the highest and best use of those assets, but it is not assumed that any revenue enhancements or synergies will be achieved.

The preliminary fair value of intangible assets was determined primarily using income approaches. This included the multi-period excess earnings valuation method for customer relationships, in-process research and development and contracts and the relief-from-royalty valuation method for trademarks and trade names, patents and trade secrets. The cost to replace adjusted for obsolescence was the valuation method used to fair value software. Some of the more significant assumptions used in the development of intangible asset values, as applicable, include the amount and timing of projected future cash flows (including net sales, cost of sales, marketing, administrative and development expenses and working capital); the discount rate selected to measure the risks inherent in the future cash flows; the assessment of the asset’s life cycle and the competitive trends impacting the asset; and royalty rates. The fair values of the intangible assets included above are preliminary and subject to change.

 

  (5) Other assets, net and other liabilities

Other assets, net and other liabilities include the fair value of the assets acquired and liabilities assumed for Diversey’s global pension and other postretirement benefit plans. We utilized third-party actuarial valuations to determine the fair value of the plan assets and liabilities of each of the individual plans as of the acquisition date. Other assets, net include $45 million of noncurrent assets related to Diversey’s pension and other postretirement benefit plans. Other liabilities include $178 million of noncurrent liabilities related to Diversey’s pension and other postretirement benefit plans. The assumed pension and postretirement liabilities as of the acquisition date consisted of projected benefit obligations of $764 million and plan assets of $630 million. See Note 14, “Profit Sharing, Retirement Savings Plans and Defined Benefit Pension Plans,” for further information of our combined company plans.

Summary Financial Information and Unaudited Pro Forma Financial Information

The following table presents financial information for Diversey that is included in our consolidated statements of operations from October 3, 2011 through December 31, 2011:

 

 

         

Net sales

   $  795.9  
   

 

 

  

Operating loss (1)

   $ (57.1 ) 
   

 

 

  

Loss from continuing operations

   $ (72.3 ) 
   

 

 

  

 

(1) This loss includes:

  •  

restructuring charges of $53 million primarily related to the 2011 – 2014 Integration & Optimization Program;

  •  

amortization of intangible assets acquired of $31 million;

  •  

a non-recurring charge related to the step-up in inventories of $12 million; and

  •  

nonrecurring charges related to associated costs for legacy Diversey’s prior restructuring programs of $12 million.

 

SEALED AIR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

 

The following table presents unaudited supplemental pro forma information as if the acquisition of Diversey had occurred on January 1, 2010 for both periods included below.

 

 

                 
    Year Ended     Year Ended  
    December 31, 2011     December 31, 2010  

Net sales

   $ 8,105.4     $ 7,617.8  
   

 

 

    

 

 

  

Operating profit(1)

   $ 637.5     $ 688.7  
   

 

 

    

 

 

  

Net earnings from continuing operations(1)

   $ 129.8     $ 173.8  
   

 

 

    

 

 

  

Weighted average number of common shares outstanding:

                

Basic

     190.8       190.0  
   

 

 

    

 

 

  

Diluted

     209.2       208.4  
   

 

 

    

 

 

  

Net earnings per common share:

                

Basic

   $ 0.68     $ 0.91  
   

 

 

    

 

 

  

Diluted

   $ 0.62     $ 0.83  
   

 

 

    

 

 

  

  

 

(1) Included in the pro forma results above is:

 

  •  

total depreciation and amortization expense of $320 million in 2011 and $329 million in 2010;

 

  •  

restructuring and other charges of $51.4 million in 2011 and $5.3 million in 2010; and

 

  •  

interest expense of $402 million in 2011 and $410 million in 2010;

 

  •  

loss on debt redemption of $39 million in 2010; and

 

  •  

effective income tax rates of 42% in 2011 and 30% in 2010, which reflect the tax benefits from legacy Diversey’s U.S. tax losses. We used Diversey’s U.S. federal net operating losses in transactions consummated before December 31, 2011.

While we have retained valuation allowances against most of Diversey’s foreign tax credits (both in the U.S. and worldwide), based on our assessment of projected U.S. taxable income, including the reversal of deferred tax liabilities, we are not retaining a valuation allowance against its U.S. federal net operating losses and U.S. temporary differences.

For the year ended December 31, 2011, material non-recurring pro forma adjustments include the removal of costs related to the acquisition of Diversey of $70 million, including $6 million of acquisition costs included in legacy Diversey’s consolidated statement of operations for the nine months ended September 30, 2011, and the removal of the step-up in inventories, net, of $12 million.

For the year ended December 31, 2010, there were no material non-recurring pro forma adjustments.