Silgan's Graham Buy Threatened - Analyst Blog

Silgan Holdings Inc.'s (SLGN) acquisition of Graham Packaging Company Inc. (GRM), might be under threat and/or get more expensive as the latter has received a higher offer of $25 per share, or $1.6 billion, from New Zealand's Rank Group.

Rank Group is owned by Graeme Hart, a businessman based in New Zealand and reportedly the richest Australasian, according to the 2009 Forbes list. Since his 2006 purchase of Carter Holt Harvey he has focused his acquisitions on the paper packaging sector.

His largest acquisition to date is Alcoa's Packaging & Consumer group for $2.7 billion in 2008, later renamed Reynolds Packaging Group. Last year the Rank Group acquired Pactiv Corp in a $4.4 billon deal. Since then, the Rank Group has added Honeywell International Inc.'s (HON) car-care products unit for $950 million and UCI International Inc. from Carlyle Group for $375 million.

Graham Packaging's board of directors is currently contemplating the offer.  In case Graham Packaging's board considers Rank Group's proposal superior compared to Silgan's, Graham Packaging is required to provide Silgan with three business days' written notice and allow Silgan to offer a matching bid.

If Graham Packaging accepts such proposal from Rank Group, Graham Packaging would be required to pay Silgan a termination fee of $39.5 million.

Earlier in April, Silgan entered into an agreement to acquire Graham Packaging Company, for approximately $1.3 billion in stock and cash. As per the offer, Graham shareholders will receive 0.402 shares of Silgan and $4.75 in cash for each share of Graham.

Including net debt, the deal ran to approximately $4.1 billion. On the basis of Silgan's closing stock price on April 12, 2011, the transaction implies a value of $19.56 per Graham share, representing a premium over the closing price of Graham's stock on April 12, 2011 of approximately 17%.

Graham Packaging is a leading global supplier of value-added rigid plastic containers for the food, specialty beverage and consumer products markets. Silgan expects the acquisition to be accretive to earnings and cash flow per share in the first full year. The acquisition will fortify Silgan as a premier food and specialty beverage packaging company with annual sales of over $6.2 billion and 180 manufacturing facilities across 19 countries.

Silgan expects to realize operational cost synergies of $50 million by the third year following the combination. These synergies will be achieved primarily through reductions in administrative expenses, procurement savings and a more efficient manufacturing cost structure. Silgan had earlier outlined plans to raise debt to fund the acquisition and meet transaction costs.

Silgan is currently the largest manufacturer of metal food containers in North America, hogging approximately half of the U.S. market in 2010. Silgan has increased its sales and market share through acquisitions as well as internal growth and, in the process, expanded and diversified its customer base, geographic presence and product lines.

The Graham packaging acquisition will enhance Silgan's ability to cater to the important markets of food, specialty beverage and consumer products, which are known for their stable demand with large, growing multi-national customers with multiple rigid packaging options.

Considering the synergies from this combination, it remains to be seen whether Silgan ups its offer and gets involved in a bidding war. We await more developments on this event. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Silgan is a leading manufacturer of consumer goods packaging products operating 68 manufacturing facilities in North and South America, Europe and Asia. In North America, Silgan is the largest supplier of metal containers for food products and a leading supplier of plastic containers for personal care products.

In addition, Silgan is a leading worldwide supplier of metal, composite and plastic vacuum closures for food and beverage products. It operates through three segments, namely Metal Food Containers, Closures and Plastic Containers. Silgan competes with the likes of Ball Corporation (BLL), Crown Holdings Inc. (CCK) and privately held Berry Plastics Corporation.