In a battle among packaging giants, Reynolds Group Holdings Ltd. confirmed June 17 that Graham Packaging Co. Inc. accepted its $25.50 per-share offer over a bid by Silgan Holdings Inc.
Reynolds' bid is 50 cents higher than its initial June 13 bid and about 15 percent higher than Silgan's April 13 offer. The overall deal, including net debt, is worth about $4.5 billion.
On June 17, Silgan officials confirmed that their deal with Graham had been terminated and that Graham is required to pay Silgan a $39.5 million breakup fee as a result.
Joseph Doyle, a spokesman for Auckland, New Zealand-based Reynolds, said by phone June 16 that Graham would be “a good strategic fit” for Reynolds and that the deal would get Reynolds “into an area that we're not exactly in right now, but that we're somewhat familiar with.”
Officials with Reynolds — which is part of Rank Group Ltd., a conglomerate controlled by media-shy New Zealand billionaire Graeme Hart — added in a news release that the firm would realize “strategic benefits and operational cost synergies as a result of the combination,” including reduced administrative expenses, procurement savings and logistics efficiencies by acquiring Graham.
Doyle declined to comment on possible product overlaps or competitive situations between Reynolds — whose portfolio includes Reynolds Food Packaging — and Graham, but industry insiders said the two firms don't compete in many areas. As a result, insiders said, the possibility of significant job cuts or plant closings would be slight under Reynolds' ownership.
Stock analyst Chris Manuel predicted June 16 — a day before the deal was finalized — that Reynolds probably would prevail.
“Silgan is incredibly disciplined. They've made a lot of transactions in the past few years and they don't overpay for things,” said Manuel, who covers Silgan and York, Pa.-based Graham for Key Banc Capital Markets in Cleveland.
“Silgan put together a pretty compelling offer, and it would have been a great deal,” but Silgan was unlikely to go higher, Manuel said.
Another packaging industry watcher, who declined to be identified, noted that Reynolds tends to pay full price for what it wants to buy.
Thomas Blaige, chairman and CEO of Blaige & Co. investment banking firm in Chicago, said the earnings multiple of the Reynolds-Graham deal — believed to be around eight times pretax profit — was “lower than expected.”
“There's a noticeable trend that packaging deals over $1 billion [as with Graham Packaging] have demanded lower multiples, because there are fewer large strategic and financial buyers due to consolidation in the sector,” Blaige wrote in a June 17 email.
Word of Reynolds' first offer sent Graham's per-share stock price up almost 16 percent to $25.60 between June 13 and late trading June 16. Conversely, that offer caused Stamford, Conn.-based Silgan's per-share stock price to drop about 9 percent to roughly $39, lowering the value of the firm's initial offer for Graham, which included portions of stock shares.
For Reynolds, its Reynolds Food Packaging unit — based in Richmond, Va. — ranks as North America's No. 14 film and sheet maker, with related annual sales of $475 million, according to a recent Plastics News ranking. Rank's other plastics-related businesses include Pactiv Corp. — which is the No. 1 thermoformer in North America, according to PN data — and machinery manufacturer Sig Combibloc.
Silgan ranks as one of North America's 10 largest blow molders and also is among the 50 largest injection molders.
The packaging market now seems to be heading into a phase where firms are willing to own multiple assets using multiple materials in multiple formats, the anonymous market watcher said.
“In the ‘70s, we had conglomerates, then those became inefficient and were broken up, so in the ‘90s we had super-specialization,” he said. “Now they're being put back together again.”
Private equity firm Blackstone Group LP of New York is the big winner. Blackstone took Graham public early last year at $10 per share, and still owns about 61 percent of the firm's common stock.
Graham had a strong year in 2010, with sales up almost 11 percent to more than $2.5 billion and profit rising more than fourfold to almost $62 million.
Silgan had a more difficult time in 2010, with overall sales roughly flat at just under $3.1 billion. Company profit fell almost 9 percent to $145 million. Plastic Containers was the smallest of Silgan's three segments in 2010, generating 19 percent of total sales. The unit's sales grew almost 9 percent to $589 million in 2010, but operating income plummeted 64 percent to just over $10 million.
Silgan's closures unit is estimated to generate about 25 percent of its sales from plastics applications, although the firm doesn't separate sales by material. The closures unit was Silgan's second-largest in 2010, with a 20 percent share of sales. The unit's sales grew almost 2 percent to $619 million, but operating income declined 22 percent to less than $59 million.
Metal Containers remained Silgan's flagship unit in 2010, with 61 percent of sales. Plastics' lesser role — and the demise of the Graham deal — have left some in the industry wondering if Silgan now will seek a buyer for the Plastic Containers business, and possibly other plastics assets as well.
“Silgan's not going to be able to find a company as good as Graham to buy,” the industry watcher said. “So [it] might have to reconsider what it wants to do with its own businesses.”