BLL Ball Corp

Silgan Holdings Inc.’s (SLGN) acquisition of Graham Packaging Company Inc. (GRM) is under jeopardy as the latter is planning to accept a higher offer of $25 per share, or $1.64 billion, from New Zealand’s Rank Group. In accordance with prior agreement, Graham Packaging has informed Silgan that it has time till Thursday to come up with a better offer.

If Silgan refrains to up the bid and consequently Graham Packaging accepts Rank Group’s offer, Graham Packaging will have to pay Silgan a termination fee of $39.5 million. Shares of Graham Packaging rose 65 cents, or 2.5%, to $26.28 while Silgan shares fell 9 cents, or 0.09%, to $40.21 on the news.

Graham Packaging is a leading global supplier of value-added rigid plastic containers for the food, specialty beverage and consumer products markets. Earlier in April, Silgan entered into an agreement to acquire Graham Packaging Company, for approximately $1.3 billion in stock and cash. Including net debt, the deal ran to approximately $4.1 billion. As per the offer, Graham shareholders will receive 0.402 shares of Silgan and $4.75 in cash for each share of Graham.

On the basis of Silgan's closing stock price on April 12, 2011, the transaction then implied 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%. However, the deal is currently worth about $21.08 per share at the end of Monday, as Silgan's stock has risen since it made the offer. That would make Silgan's deal worth $1.38 billion.

The Silgan-Graham combination came into jeopardy as Graham Group was approached by Rank Group on Monday with a superior offer of $25 per share. 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, the entrepreneur has focused his acquisitions on the paper packaging sector.

His largest acquisition till date is Alcoa's Packaging & Consumer group for $2.7 billion in 2008, later renamed as Reynolds Packaging Group. Last year Rank Group acquired Pactiv Corp in a $4.4 billon deal. Since then, 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.

If Silgan can pull off the acquisition, it expects the deal to be accretive to earnings and cash flow per share in the first full year of operation. 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, if successful. 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 is important for Silgan as it will enable the company 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, and the obvious benefits that Silgan would reap from such an alliance, it remains to be seen whether the company takes the bait and ups its offer in the coming three days. We await further 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.

 
BALL CORP (BLL): Free Stock Analysis Report
 
CROWN HLDGS INC (CCK): Free Stock Analysis Report
 
GRAHAM PACKAGNG (GRM): Free Stock Analysis Report
 
HONEYWELL INTL (HON): Free Stock Analysis Report
 
SILGAN HOLDINGS (SLGN): Free Stock Analysis Report
 
Zacks Investment Research