London packaging firm Rexam plc has made its move on the proverbial global chessboard, agreeing to acquire the remaining plastics assets of Owens-Illinois Inc. for $1.8 billion.
The deal, announced June 11, catapults Rexam into the top position in the United States for pharmaceutical packaging and closures production.
``This is a big deal and a big strategy move for Rexam in finalizing our transformation into two global, sizable, well-positioned businesses with our [metal] can and our plastics businesses,'' said Leslie Van de Walle, Rexam's chief executive officer, during a June 11 teleconference.
The deal boosts Rexam's plastics sales by more than 60 percent, and its profit by more than 70 percent, Van de Walle said. Plastics now will represent one-third of Rexam's total business, and the company plans to leverage scale in its procurement, supply chain and manufacturing assets.
O-I Plastics is known for its rigid plastic health-care packaging and closure systems. The unit had 2006 sales of $760 million with profit of $114 million. Slightly more than 90 percent of O-I's business is based in North America.
Several analysts and consultants expressed concern that Rexam is paying too much.
``Historically, when companies have paid in excess of nine times [earnings before interest, taxes, depreciation and amortization], the ability to create value is diminished,'' said Tim Burns, principal of Solon, Ohio-based Cranial Capital Inc.
At face value, the price tag of $1.8 billion represents 11.3 times the O-I plastics business's 2006 EBITDA. But Rexam said it will recoup $260 million through tax gains over a 15-year period. Excluding the tax gains, the cost of the plastics assets is roughly $1.5 billion, or slightly more than nine times EBITDA.
Wachovia Capital Markets LLC analyst Ghansham Panjabi said his firm remains cautious about the transaction because of the integration risk, pricey multiple and other issues that weigh on Rexam's outlook, including aluminum prices for its beverage can business.
``After a costly acquisition spree in 2005 and early 2006, followed by the dramatic increase in base [capital expenditures], our view is that Rexam has yet to deliver in terms of outsized earnings growth,'' Panjabi wrote in a June 11 research report from New York-based Wachovia.
Van de Walle addressed the purchase price during the teleconference.
``In our view, this is a very fair price because of what it brings strategically and operationally to Rexam,'' he said. Rexam expects to save $40 million annually in synergies it has identified between the two businesses.
Van de Walle said he expects the acquisition to meet Rexam's cost of capital in 2009, and to be modestly earnings-enhancing in 2008.
``And if you look at margin, already Rexam was one of the most profitable plastic businesses in the world, and with O-I now - and even before synergies - we're having the most profitable plastics business in the world,'' he said.
Perrysburg, Ohio-based O-I's approach to innovation attracted Rexam. In the fast-paced markets of health-care packaging and closures, O-I boasted one-third of its 2006 sales from products that were developed in the past three years. O-I has 130 employees in research and development at its technical center in Toledo, Ohio.
``This is not just something they've been telling us,'' said Graham Chipchase, Rexam's group director of plastic packaging. ``We can see how they've been doing.''
O-I has launched more than 160 new products in the past five years. The company holds 200 U.S. and 300 foreign patents.
One product nearing commercialization is Multi-Layer, an injection blow molded diagnostic vial that Chipchase said is intended to replace glass vials because of the concern of breakage in medical labs.
O-I also has specialized radio-frequency identification technology, Chipchase said.
``With pharma business around the world, there is much more interest in being able to trace every single container, every single drug,'' he said.
O-I also gives Rexam compression molding technology for making closures.
``Compression molding is great if you want to have low-cost, very high-volume standard screw closures,'' Chipchase said. ``O-I has done a lot of things with compression molding that a lot of other people can only do with injection molding.''
Rexam hopes to focus on complementary strengths, especially in terms of geography.
For example, O-I has a beverage closure business in the United States, but not much outside the country. Rexam is strong in carbonated soft drinks outside America through its beverage can connections.
``So we can now start to help fill up the plant in Hungary, maybe do something more in Russia and look to places like China,'' Chipchase said.
The company also has eyed Brazil for more plastics operations. ``It all becomes much more possible, and in the past O-I Plastics [has] probably been constrained from being able to do that,'' he said.
Many products made by O-I's health-care business are suited for markets like India, he said.
Industry sources hold O-I's plastics assets in high regard.
Even though Rexam's beverage-can business is mature, it's the company's cash cow.
``The need for Rexam to build another core leg of its business was important,'' Burns said. If the company had stopped its plastics acquisitions before purchasing O-I's assets, ``it would not have been enough to garner the trust of investors or drive earnings growth.''
O-I's plastics business now has a very interested and supportive parent company, said Howard Snyder, a vice president with Curtis Financial Group LLC in Philadelphia.
``When you see the opportunity to get a platform in the single-largest contiguous market in the world, you have to be opportunistic,'' Snyder said.
What will the deal mean to others in the packaging market? Snyder does not believe it will spur mergers among smaller players.
``I don't see any ripple effect. This is far above the realm that the large majority of plastics processors operate in,'' Snyder said. He added Rexam could be distracted by the vast job of combining the businesses.
``The aggressive, smaller molder may find some smaller opportunities,'' he said.