Viskase Companies, Inc.

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Viskase Companies, Inc.

6855 West 65th Street
Chicago, Illinois 60638
U.S.A.
Telephone: (630) 789-4900
Toll Free: (800) 323-8562
Fax: (708) 496-4412
Web site: http://www.viskase.com

Public Company
Incorporated: 1970 as Envirodyne Industries, Inc.
Employees: 1,400
Sales: $189.3 million
Stock Exchanges: OTC
Ticker Symbol: VCIC
NAIC: 325188 All Other Basic Inorganic Chemical Manufacturing

Viskase Companies, Inc. is a Chicago-based corporation that is a world leader in the production of nonedible cellulose and plastic casings and nettings used in the preparation and packaging of processed meat and poultry products. Smaller diameter products like hot dogs, smoked sausages, and beef sticks use the company’s NOJAX Casings. Large cellulose casings, which can be smoked, are suitable for medium-sized meat products like bologna, salami, and semi-boneless hams. Fibrous casings can accommodate a variety of sizes for processed meats such as bologna, ham, and salami, as well as poultry products. These food products are also suitable for Viskase’s polyamide casings, VISFLEX and VISMAX, which can be used for cooking and shipping. The company’s SCOTnet Nettings, made of polyester elastic, are used in both processed meats and poultry products. In addition, Viskase uses regenerated cellulose to produce MEMBRA-CEL, a hydrophilic membrane suitable for dialysis purposes in the laboratory. The company has suffered a number of setbacks in recent years, starting with a leveraged buyout (LBO) in 1989 that saddled it with massive debt and including outbreaks of “Mad Cow” and foot-and-mouth disease that have hurt the sale of beef products around the world. As a result the company has been forced to shed assets and close plants, while having its stock delisted by the NASDAQ in 2000.

1920s Origins

The history of Viskase began with Erwin O. Freund, who sponsored research to find a substitute for the animal gut casing that was the basis of his Chicago business. For hundreds of years sausages and similar foods had relied on the cleansed intestines of sheep, cows, or pigs, casings that possessed a number of drawbacks. Because the American sausage industry had to rely on other countries to provide it with large numbers of intestine casings, its growth was stunted. Freund’s goal was to find an alternative to natural casings, one that relied on a readily available raw material, was strong enough to withstand the pressure of meat forced into it and the cooking process, and could be created in uniform sizes. Freund’s researchers latched onto the “viscose” process, which relied on purified cotton cellulose that was processed into filaments. This material was then coated on a pipe, dried, and removed by dipping in a vat of weak acid. The resulting tube was stuffed with meat, linked, and brought to the smokehouse. When smoked the casing sagged, which at first appeared to be a major disappointment, but it was quickly realized that when the casing was removed the meat inside remained intact and firm. Instead of creating a synthetic edible casing, Freund had stumbled upon the Skinless Frankfurter.

Freund organized his new business as the Visking Corporation in 1925 and began producing NOJAX casing for frankfurters in a small building located in the Chicago Union Stockyards. The company continued its research efforts and in 1927 introduced cellulose casings for large sausage products. In 1931 Visking developed a way to print on the casings, to make trademarks and promotional material visible in the meat case, and also brought out the first colored casings. Even stronger cellulose casings were introduced in 1935. In 1941, to spur research efforts, as well as sales, Visking founded the Foods Science and Quality Institute to help the meat and poultry industry to produce new products and make better use of Visking products. During the 1950s Visking developed striped NOJAX casing, fibrous casings called E-Z PEEL, and TASTIJAX, a casing made from algin. Moreover, the company’s research took Visking into areas beyond casings, transforming it into the largest U.S. producer of polyethylene film. It developed Visten, a plastic film for packaging food products, and a transparent plastic film it called Visqueen, which found applications in containers, aprons, shower curtains, aprons, raincoats, and as a moisture barrier building material.

Selling Visking to Union Carbide in 1956

With innovation came prosperity. In 1932 demand for Visking products was strong enough to warrant the building of a new plant in Chicago. In the 1950s, manufacturing facilities were opened in Loudon, Tennessee, and Beauvais, France. In 1956 the company, now a public corporation, recorded net sales of $57.7 million, while earning more than $5 million, or $2.36 per share, prompting a three-for-one stock split. At this point the company chose to shed it independence and join forces with the major supplier of the raw materials it needed to produce polyethylene film—Union Carbide and Carbon Corporation and its resin-producing subsidiary, the Bakelite Company. Union Carbide acquired Visking in 1956, a $91 million stock deal that gave shareholders one share of Union Carbide for every 2.5 shares of Visking, which now began operating as the Visking Co. division of Union Carbide. Six months after Visking shareholders approved the deal, however, the Federal Trade Commission stepped in, filing a compliant that charged Union Carbide with violating antitrust legislation, the first time that the FTC objected to a “forward vertical” merger, one in which a supplier acquired a customer. The complaint maintained that Visking was in a position to acquire a monopolistic control over the polyethylene industry, essentially because its corporate parent had the power to manipulate resin prices.

Union Carbide denied the charges but in October 1961 the FTC ruled that the corporation had one year to divest itself of its Visking holdings. The corporation appealed, but finally in 1963 it was forced to sell the polyethylene film operations of Visking, including the Visqueen trademark, to Ethyl Corp. The casing business continued as the Visking division of Union Carbide, then on July 1, 1964, changed its name to the Food Products division, to better reflect the subsidiary’s commitment to the food industry. No matter what its name, the old Visking operation continued to develop new products. In the 1960s it introduced SHIRMATIC fibrous casings that worked with highspeed, automatic stuffing equipment that its researchers also developed. It introduced heat shrinkable bags, sold under the brand name PERPLEX, which were used by processed meat and cheese producers to package and preserve their products. The Union Carbide unit now changed its name to the Films Packaging Division, again to better reflect the scope of its activities. Business grew so much that new plants were opened around the world in the 1970s, including Thaon, France;

Pulheim, Germany; Caronno, Italy; as well as an applications laboratory in Beauvais, France. Domestic facilities also were built in Osceola, Arkansas and Kentland, Indiana.

Problems encountered by Union Carbide in the mid-1980s led to a change of ownership for the former Visking business. In December 1984 a Union Carbide pesticide plant in Bhopal, India, suffered one of the largest industrial accidents in history when a cloud of lethal gas escaped, killing 1,757 people and affecting some 300,000 others. Already facing litigation for this incident, Union Carbide experienced a similar, albeit smaller and less tragic, accident at a West Virginia plant, injuring 135 people and resulting in the largest fine, $1.4 million, ever levied by the Occupational Safety and Health Administration. The company’s stock plunged in the aftermath of these events, making it an attractive takeover candidate. In 1985 it fought off a hostile takeover bid by GAP Corporation, but as a result of buying back a large number of shares it doubled its debt to an unmanageable $4.5 billion. To reduce this debt Union Carbide was forced to shed assets, primarily its consumer products divisions but also some industrial divisions, including the Films Packaging. In February 1986 the worldwide business was sold to Chicago-based Envirodyne Industries, Inc. for approximately $230 million. New management placed the assets under a new subsidiary incorporated as Viskase Corporation.

Envirodyne was founded in 1970 by Ronald K. Linde and was involved in environmental technology until 1982 when Linde decided to turn to “relatively mundane businesses where we could add value.” It entered the plastics industry with the 1983 acquisition of Harvel Industries, which began operating as Clear Shield National Inc., producing such items as plastic flatware and drinking straws. Management displayed a sure hand at building profitability by tightly controlling inventories and accounts receivables. As a result Clear Shield began to grow profits at a clip of 30 percent per year. It was the Union Carbide deal, however, that caught the attention of the investment community. The Viskase assets boosted Envirodyne’s sales by 600 percent and profits by 300 percent. Moreover, the price of its stock soared from $8 per share to $32. Envirodyne next bought the Filmco division from RJR Nabisco Inc. for $35 million in cash. The unit manufactured PVC stretch and single-layer plastic under the Filmco name, used to package foods and wrap grocery products. In addition, polypropylene films were used to package European bakery goods, and polystyrene rigid food packaging materials were produced. These assets operated as the Filmco Industries subsidiary before being integrated into Viskase. To achieve its rapid growth, Envirodyne took on considerable debt, equal to about 2.5 times its equity, but management felt confident enough of its cash flow to make yet another significant acquisition in 1988, buying Sandusky Plastics, makers of plastic containers, from The Chariot Group for approximately $27 million.

Company Perspectives:

Viskase is a customer driven company that excels in delivering technically superior, value-adding solutions to our customers, enhances shareholder value and provides career opportunities to our employees.

1989 Takeover Resulting in Crippling Debt

Envirodyne appeared to be a thriving business with its three main subsidiaries performing well, but in 1989 the company attracted the attention of Donald P. Kelly, a well known Chicago dealmaker. He made his mark in the 1980s when as the head of Esmark Inc. he pocketed approximately $15 million by selling the company to Beatrice Cos., then two years later, with backing from Kohlberg Kravis Roberts, led a $6.2 billion leveraged buyout of Beatrice, and earned close to $100 million by selling the business to American Brands. In his late 60s Kelly appeared to be retired, but in 1989 he mounted a $900 million leveraged buyout of Envirodyne with backing from Salomon Brothers. With only $2 million of his money in the deal, Kelly emerged as chairman and CEO of the corporation.

Already servicing a heavy debt load, Envirodyne quickly reached a tipping point because of the LBO, with its slow-growth businesses unable to keep up with interest payments, resulting in mounting losses. In 1991 alone the company lost $31.8 million. Nevertheless, Kelly and his partners continued to extract their management fees, by 1993 collecting some $7.4 million. In addition, a unit of Salomon Brothers received more than $33 million for investment banking and management service fees incurred from 1989 to 1991. The company was finally forced into Chapter 11 bankruptcy in 1993, but after it emerged it displayed little improvement. Envirodyne posted a net loss of $3.6 million in 1994. The Viskase subsidiary endured a difficult year, due in large part to a baseball strike that hurt the sale of hot dogs. Moreover, it faced new competition in casings with Spain-based Visco SA and British Devro International plc entering the U.S. market. The result was lower costs for casings, and because Viskase costs remained the same, the difference came out of the company’s margins.

After Kelly retired as CEO and chairman in 1996, Envirodyne fought off a takeover attempt by energy company Zapata Corp., which was shifting away from the oil and natural gas business. The company continued to lose money, $21.5 million in 1995 and $13.7 million in 1996, leaving management with no choice but to begin selling off assets. In 1997 Viskase sold its PVC flexible film business to Linpac Plastics Ltd., a British firm. The following year Envirodyne took even more radical steps. Sandusky Plastics was sold to Whitely Industries, and Clear Shield went to Solo Cup Co. for $140 million. With Viskase Corp. now Envirodyne’s core business, shareholders voted in August 1998 to change the name of the parent corporation to Viskase Companies, Inc. It cut costs by laying off workers and looked to a new, cheaper manufacturing technique it called Nucel to produce less expensive casings. Nevertheless, management also hired New York investment baking firm Donaldson Lufkin & Jenrette Securities Corp to find a buyer for the business. Having failed to turn a profit for close to a decade, Viskase attracted no suitors and the company continued its downward spiral, the situation only exacerbated by incidents of “Mad Cow” disease in England that adversely impacted the consumption of meat and in turn the demand for casings.

In early 2000 the price of Viskase stock fell so low that the company had a market capitalization of just $25 million, leading to it being delisted by the NASDAQ and moving to the OTC Bulletin Board. To reduce its remaining debt of $425 million, in July 2000 the company sold its plastic barrier and shrink film business, which accounted for 40 percent of its total revenues, to the Bemis Company for $245 million. Now solely focused on its casings business, Viskase continue to lose money, $17.8 million in 2000, followed by $25.5 million in 2001. Business was especially hurt by mad cow disease spreading to the European continent and an outbreak of foot-and-mouth disease in the United Kingdom. With the American economy struggling as well, Viskase’s road to fiscal health appeared uncertain at best.

Principal Subsidiaries

Viskase Corporation; Viskase S.A. (France); Viskase Brasil Embalagens Ltda. (Brazil).

Principal Competitors

Devro plc; Viscofan S.A.

Key Dates:

1925:: Erwin O. Freund founds Visking Corporation.
1957:: Visking is sold to Union Carbide.
1970:: Envirodyne Industries is formed.
1986:: Envirodyne acquires former Visking assets, forming Viskase Corporation.
1993:: Envirodyne files for bankruptcy protection.
1998:: Envirodyne changes its name to Viskase Companies, Inc.
2000:: The company is delisted by the NASDAQ due to low market capitalization; the plastic barrier and shrink film business is sold to the Bemis Company for $245 million.