PalEx Goes Global

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.