Silgan Raising Debt to Buy Graham - Analyst Blog
April 19 2011 - 2:24PM
Zacks
Silgan Holdings
Inc. (SLGN) has outlined terms to
raise debt up to $4.5 billion to fund the acquisition of
Graham
Packaging Company Inc. (GRM).
As disclosed
in its regulatory filing, Silgan has entered into an agreement
with Bank of America
Corporation (BAC), under which an aggregate
of $4 billion will be made available to Silgan through the
following – a $ 900 million Term A loan maturing in 6 years, a $2.3
billion Term B loan with a maturity period of 7 years and a $800
million five-year revolving credit facility.
In addition,
Silgan will also receive a bridge loan of up to $500 million
backing a notes offering. The company can also increase its
borrowing capacity under the credit agreement by as much as $750
million.
Silgan’s
term loan A and revolver will carry an interest rate 2.5 percentage
points more than the London interbank offered rate (Libor) and the
Term loan B will charge an interest margin of 3.25 percentage
points more than Libor.
The
revolving facility will charge a 0.5% fee on the unused portion of
the credit line. Silgan’s bridge loan will have an initial margin
of 5.5 percentage points over Libor. The margin will increase by
0.5 percentage point every three months for as long the bridge loan
is outstanding.
The term
loan A will be subject to annual repayment beginning December
31, 2013, of principal in amounts to be agreed upon. The term loan
B will be subject to annual repayment commencing December 31, 2012,
of principal equal to 1% of the aggregate with the balance payable
at maturity.
Silgan had
announced last week its definitive agreement to acquire Graham
Packaging, for approximately $4.1 billion, including debt. Graham
Packaging is a leading global supplier of value-added rigid plastic
containers for the food, specialty beverage and consumer products
markets.
As per the
offer, Graham shareholders will receive 0.402 shares of Silgan and
$4.75 in cash for each share of Graham, representing a total
enterprise value, including net debt, of approximately $4.1
billion.
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 the acquisition to be accretive to earnings and cash flow
per share in the first full year.
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.
The deal has
been approved by both Silgan's and Graham’s boards of directors.
The acquisition is currently expected to close in the third quarter
of 2011, subject to the approval by both the companies’
shareholders, regulatory bodies and other customary closing
conditions.
Silgan is
currently the largest manufacturer of metal food containers in
North America and controlled 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.
On the
flipside, Silgan’s debt-to-capitalization ratio deteriorated to 62%
as of December 31, 2011 from 54% as of December 31, 2009. Debt
incurred to fund the Graham acquisition and assumption of Graham’s
debt will further aggravate Silgan’s debt position.
Margins also
remain under pressure given the inability to pass through higher
raw material costs and the added burden of escalating interest
rates emanating from the loaded debt levels. We currently have a
Zacks #3 Rank (short-term Hold 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.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BALL CORP (BLL): Free Stock Analysis Report
CROWN HLDGS INC (CCK): Free Stock Analysis Report
GRAHAM PACKAGNG (GRM): Free Stock Analysis Report
SILGAN HOLDINGS (SLGN): Free Stock Analysis Report
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