British packaging company Rexam has agreed to buy the plastic packaging business of U.S. company Owens-Illinois for $1.83 billion, targeting the fast-growing market for packaging medicines, it said on Monday.
Rexam, the world's biggest drinks can maker, hopes to benefit from a boom in the $4 billion U.S. health packaging market, which is expanding by 7% a year as the ageing and health-conscious population take more medicines.
O-I Plastics, whose healthcare packaging customers include Pfizer, Bausch & Lomb and Bristol Myers Squibb, generated revenues of about $760 million and underlying profit of $114 million for the year to end-September 2006.
O-I Plastics, with headquarters in Perrysburg, Ohio, makes plastic healthcare packaging and plastic seals. It supplies PepsiCo, Coca-Cola, Nestle and Procter & Gamble with seals for fizzy drinks, water and food.
More than 90% of O-I Plastics' sales and profits are generated in the U.S. market, while Rexam's healthcare packaging base is mainly focused on Europe, the United States and India.
Rexam said it would place 58.35 million new shares, or 9.99% of its existing share capital, to help pay for the deal in cash. That would raise around 300 million pounds ($593 million) at Friday's closing price of 511-1/2 pence.
It is also raising 500 million pounds ($983.9 million) equivalent through a bond issue, one of the banks managing the sale said.
Lipstick and Eye Drops
Rexam makes more than 50 billion cans and around 7 billion glass containers a year, as well as lipstick cases, perfume and eye drop dispensers and nasal sprays. Rexam also supplies cans to Coca-Cola and PepsiCo.
Rexam, which said on Friday it was in talks with Owens-Illinois, expects the acquisition to meet its cost of capital in 2009 and to be modestly earnings enhancing in 2008.
The effective acquisition cost of $1.57 billion, after excluding $260 million in tax-related charges, represents 2.1 times 2006 sales and 13.7 times 2006 underlying profit, Rexam said.
"This transaction is fully in line with Rexam's strategy to expand our position in core markets," Rexam Chief Executive Leslie Van de Walle told reporters.
"It gives us meaningful scale in plastics, leading market positions in core growth markets and is anticipated to create significant value through synergies and cross-selling opportunities."
Rexam said it expected to have cost and revenue synergies of around $40 million per year by 2010. It expects integration costs of $20 million and capital investment in new IT systems of $25 million in 2007 and 2008.
Shares in Rexam shares were down 3.1% at 495-1/2 pence, having fallen as low as 492p -- their lowest since early March.
"The deal ... reflects the pattern of consolidation both in Europe and globally which is being undertaken by the stronger players," Nick Spoliar, analyst at brokerage Bridgewell.
"The acquisition at two times sales ... is nonetheless a bold move for Rexam and shows their ambitions to be a global player in rigid plastics as they are in cans."
Brokerage Seymour Pierce also said the price was at the top end of the range it had expected, although the new equity funding was in the middle of the range.
"At the price paid, the deal will only just be earnings enhancing in 2008... Given the weak outlook for the current year, it appears shareholders are in for a long wait," it said.
Rexam will also pay for the deal with the proceeds of the sale of its glass unit which Rexam said in March it would sell for 660 million euros.
O-I said it would use the sales proceeds to reduce debt.