Silgan Holdings Inc.'s announcement April 13 that it plans to acquire Graham Packaging Co. Inc. has been greeted positively by packaging industry observers.
For Silgan, it represents a shift away from metal packaging, which represents 64 percent of the firm's sales before the merger and will be just 35 percent once the deal closes.
By combining the businesses, Silgan and Graham shareholders will now own part of an entity double the size of its predecessors in revenue and market share, John Hart, director of the plastics and packaging group at P&M Corporate Finance LLC in Southfield, Mich., said in an April 14 email.
The new business will be well-positioned to compete and maintain leadership against ever-larger, aggressive blow molders including Amcor [Rigid Plastics], Plastipak [Packaging Inc.] and Berry Plastics [Corp.], Hart said.
Graham brings to Silgan best-in-class technology for blow molded packaging with high-speed machinery, hot-fill processing, and numerous patents on its products, he said.
According to a recent investor presentation, Silgan has more than 1,000 patents on its product lines, and 80 percent of its products use proprietary technology in areas such as multilayer barrier production, lightweighting and post-consumer recycling.
Graham does have very good assets and their business model is very similar to Silgan. ... It is nicely accretive to both Silgan and Graham, said Ghansham Panjabi, Milwaukee-based senior analyst for containers and packaging at Robert W. Baird & Co. Inc.
Rigid plastics need more consolidation this certainly helps kick-start the process, Panjabi said in an April 13 email.
Stamford, Conn.-based Silgan said it will buy Graham of York, Pa., for $4.1 billion, including debt. The deal expected to close in the third quarter will double Silgan's size, according to company officials, and will create the largest blow molder in North America.
The merger is subject to shareholder and regulatory approval. Blackstone Capital Partners III LP, its affiliates and the Graham family, who collectively own 65 percent of Graham's common shares, have agreed to vote for the acquisition.
According to Silgan's Securities and Exchange Commission filings April 13, the combined plastics businesses will be renamed Silgan Graham Packaging and will be headquartered in York. Adam Greenlee, Silgan's executive vice president and chief operating officer, will lead the new company.
Combined, the companies' annual sales exceed $6.2 billion and they employ more than 17,000 in 180 plants in 19 countries.
Under terms of the agreement, Graham shareholders would get 0.402 Silgan shares and $4.75 for each Graham share. That values Graham's equity at $1.25 billion.
The transaction's $19.56 per-share price is a 17 percent premium over Graham's closing price April 12, and an appreciation of 91.7 percent from its initial public offering Feb. 10 of $10.20 a share.
Silgan expects to realize operational synergies of $50 million by the third year after the deal is finalized, primarily through reductions in administrative expenses, procurement savings and a more efficient manufacturing cost structure, according to the April 13 news release.
In response to the announcement, Standard & Poor's ratings service placed Silgan on CreditWatch with negative implications. New York-based S&P placed its corporate credit and debt issue ratings on Graham on CreditWatch with positive implications. Upon completion of the Graham acquisition, S&P expects to lower the ratings on Silgan to BB/Stable from BB+/CreditWatch Negative, analyst Liley Mehta said in a note to investors.
This ratings expectation is based on our assumption that operating results will remain generally stable this year and that Silgan will raise permanent financing for the acquisition prior to closing. If credit market conditions deteriorate, and the company uses short-term financing to close the acquisition, we will reassess credit quality, Mehta said in the release.
S&P expects Silgan's initial pro forma adjusted debt ratio to earnings before interest, taxes, debt and amortization to be 4 times to 4.5 times, and its funds from operations to its adjusted total debt percentage to be in the midteens initially, with the FFO/total adjusted debt ratio strengthening to about 20 percent by the end of 2012, Mehta said.
We expect Silgan to prioritize debt reduction following the transaction, and that the combined company's business risk profile would be stronger, as its scale, product mix, and customer diversity would all be augmented, she said. An important underpinning to the ratings is our belief in the company's ability to generate strong and relatively stable cash flows and management's track record of, and commitment to, using substantially all available cash flow to reduce debt following the acquisition.
Most of the new firm's plastics operations will be in North America, although it has significant operations in Europe, and a growing presence in China and India.
Graham was the No. 2 blow molder in North America in Plastics News' most recent ranking, with sales of $1.94 billion and that was not counting its recently completed acquisition of Chicago-based Liquid Container LP, which has sales of $400 million.
Silgan ranked No. 8 in the blow molders ranking with relevant sales of $541.5 million.
Silgan also is a major closure molder the company ranked No. 41 in Plastics News' survey of North American injection molders, with estimated sales of $138 million.
Graham entered the China market in April 2010, and the company had set an aggressive target of up to $300 million in sales in China and Asia within five years.
Graham specializes in plastic containers for hot-fill juice and juice drinks, sports drinks, drinkable yogurt and smoothies, nutritional supplements, wide-mouth food, dressings, condiments and beers. It also makes plastic containers for liquid fabric-care products, dish-care products and hard-surface cleaners; and plastic motor oil containers.
Including Liquid Container, Graham posted 2010 sales of $2.8 billion. It employs 8,200 at 97 manufacturing plants in 15 countries.
Silgan makes metal and plastic containers, and plastic closures. It reported 2010 sales of $3.1 billion. The company employs 9,000 at 83 plants in 19 countries.
P&M's Hart said that based on Graham's 2010 financial results, Silgan will pay 8.1 times EBITDA and with the assumed synergies, that drops to 7.4 times.
P&M is forecasting that the merger will highlight operational redundancies, resulting in significant layoffs of management, sales, and other administrative staff.
In a letter to Silgan employees on the day of the merger announcement, Alan Koblin, president of Silgan Plastics, alluded to the uncertainty that lies ahead during the next 90 days as the companies are integrated.
As with any business combination of this size, there will inevitably be changes we will all need to manage through, he said.