Citi On Owens Illinois: 'Vitro Deal Compelling,' Growth In Mexico

In a report published Thursday, Citi analysts maintained a Neutral rating on Owens-Illinois Inc (NYSE: OI), while raising the price target from $26 to $28.The $2.15 billion purchase of Vitro's food and beverages glass container unit is expected to boost Owens-Illinois' margins. According to Citi's pro forma analysis, the deal is expected to be accretive by about $0.45 to EPS in Year 2 and about $0.55 in Year 3. This translates to $66mm additional free cash flows in Year 2 and $96mm in Year 3."From an operational standpoint Vitro fits well with OI's existing LatAm business (25%+ margins, diversified end markets & product mix) and boosts OI's presence with key customer STZ. While synergies are modest ($30mm or ~3% of target sales) integration risks appear low given limited overlap with existing assets; this contrasts with the $2.3B consolidating acquisition of BSN in Europe (OI's last large deal, done in 2004)," the analysts commented. "Overall we view the deal as positive news following a difficult year for OI marked by multiple guidance cuts and mgmt departures," the analysts added.The company's significant European exposure and the potential negative impact on its earnings due to European restructuring remain areas of concern.Currency headwinds and a loose supply demand balance in Europe may restrict Owen-Illinois' stock valuation in comparison to other players in the packaging group. "Also the lengthier closing time of the deal (12 months) and limited visibility into purchase accounting and post-close tax items add some uncertainty to our pro forma estimates," the report mentioned.