Graham Packaging Co. LP aims to be North America's largest blow molder with the purchase of most of rival Owens-Illinois Inc.'s blow molding business. The two firms announced the deal after business hours on July 28.
The combined entity will have $1.8 billion in annual sales and 63 production plants in North America. Its closest rival, Amcor PET Packaging of Manchester, Mich., had sales of $1.2 billion for the year ended June 30, 2003.
``It's a good marriage,'' said analyst Timothy Burns with Cranial Capital LLC of Solon, Ohio. ``Graham is probably the only company with true synergies with [the O-I assets].''
Both firms are big in custom PET containers and extrusion blow molding of high density polyethylene. O-I's HDPE business has been suffering of late by losing market share but ``Graham is a fine operator of HDPE and can shore the O-I business up,'' Burns said in a telephone interview.
The deal could help New York private equity firm Blackstone, majority owner of Graham, monetize its stake in the business, Burns said. Once Graham combines assets and reduces overhead, a bigger, more profitable Graham could be a more attractive candidate for an initial public offering in a year or two, he explained.
Graham intended an IPO in 2002 then delayed its plan to 2003. Market conditions still weren't right and it did not go ahead with an offering that year either.
While the deal will consolidate a big chunk of North America's blow molding industry, we can expect further consolidation, predicted Ghansham Panjabi, an analyst with Lehman Bros. in New York.
``There is a lot of capacity,'' Panjabi said. ``It is a growing market that has attracted a lot of entrants.''
Panjabi said the purchase price of $1.2 billion in cash is ``pretty reasonable,'' working out to about 6.5 times estimated earnings before interest, taxes, depreciation and amortization (EBITDA) for 2004.
Burns said the consolidation could help firm up packaging prices. While raw material prices have risen mercilessly, packaging customers still resist absorbing higher costs.
``Once this transaction closes, we will go through an intense period of evaluation to determine how the two organizations will knit together,'' said Graham President and Chief Operating Officer Roger Prevot.
One way to reduce the number of production plants is to load up Graham's on-site blow molding operations with outside, noncompetitive work, Burns said. For example, a site in a household chemicals plant could also blow mold bottles for motor oil during what might otherwise be downtime.
Despite the planned sale, O-I will continue to be a force in plastics markets as it retains 19 blow molding and injection molding plants that generate sales of about $600 million a year. About half the retained plastics business is geared to health-care products such as vials and syringes and the rest is for specialty closures, dispensing systems and to a lesser degree, printer ink cartridges.
O-I spokeswoman Sara Theis said the Toledo, Ohio, company considers the plastic specialties a core business because the firm has proprietary technologies, and because they do not compete with its huge glass containers business.
``We will invest in our remaining plastics businesses,'' Theis said in a telephone interview. Fourteen of the retained operations are U.S.-based. Single plants are in Hungary, Brazil, Singapore and Australia. The latter is the only plant left from the plastics part of its ACI Packaging business. O-I recently sold most of that plastics unit to Visy Industry Plastics.
O-I said late last year it was exploring options for its blow molding business. It will use proceeds from the sale, expected to be complete in the fourth quarter, to pay down debt. O-I greatly expanded in blow molding in 1998 when it bought the plastics and glass packaging operations of BTR plc of London, which owned Continental PET Technologies Inc. At the time, O-I paid $3.6 billion for the assets, nearly 12 times the business's EBITDA of $305 million. By contrast, analysts estimate O-I is selling most of its blow molding business to Graham for six to seven times EBITDA.
The deal with Graham was much rumored and anticipated.
After the announcement, Standard & Poor's Ratings Service affirmed a BB- credit rating on O-I with a negative outlook, largely because of subpar credit measures and concerns about its asbestos liability. S&P placed a B corporate credit rating on Graham with concerns about how it will finance the O-I asset acquisition.
The new, bigger Graham will have global sales of $2.2 billion, 9,000 employees and 88 plants. O-I plants added to the mix include two in Mexico, three in Europe and two in South America. Graham will retain its head office in York, Pa. Donald Graham, Graham Packaging's founder, who sold controlling interest to Blackstone in 1998, will maintain his 15 percent ownership stake in the combined company. Graham currently has about 4,000 employees at 57 plants worldwide. Its global sales in the past 12 months were $1 billion.
Glass will account for more than $4 billion in O-I's sales. It recently expanded in glass in Europe by paying about $1.4 billion for BSN Glasspack SA.