Ball’s offer to buy Rexam could result in the formation of the world’s biggest canmaker. But it won’t be a simple transaction, as Arthur Stupay explains
In many ways, Ball Corporation’s revelation early in February that it was in acquisition talks with Rexam plc was a surprise to the market. Dedicated beverage canmaker Rexam was not in financial distress and seemed upbeat about its prospects. Furthermore, the London-based management is intact and it did not seem to be suffering any significant problems that were unique.
In Europe, where the market for beverage cans is about 60bn a year, the combined share of a merged Ball and Rexam would be almost 70 percent, triggering the attention of anti-monopoly regulators.
But there had been rumours of talks, which is why first Rexam said that “it is in discussion with Ball Corporation which may or may not lead to a formal offer being made for Rexam”, followed by Ball’s confirmation.
Ball followed up with a firm offer that valued the transaction at £5.4 billion (US$8.4bn) in cash and stock, including the assumption of net debt. The offer was for 610p per share (well in excess of Rexam’s market value), but at the time of going to press this was in the process of rising as shareholders shuffled their position. By any reckoning, it was likely to be the largest deal in the canmaking world in the two decades since Crown Cork & Seal bid $5.2bn for CarnaudMetalbox in 1995.
Maybe it was the absence of new pressures on Rexam that attracted the attention of a larger company like Colorado-based Ball, since acquirers prefer untroubled companies. Ball has not been shy about acquisitions, with a string of them in the past ten years, including China’s MC Packaging, US Can, four beverage can and end plants from A-B InBev’s Metal Container Corp, as well as acquisitions in the aluminium slug and monobloc aluminium aerosol businesses in the US, Europe and Mexico.
Earlier in the 1990s, it acquired among others the canmaking operations of Reynolds Metals (with operations in the US and Brazil), Continental Can Europe, and US-based food canmaker Heekin Can.
Another factor may have been that Ball senses that it could face a slowdown in its key markets in the US and Brazil, and with continued challenges in China due to heated local competition. Finally, it may have felt growing pressure to keep up with Crown’s recent acquisitions of Mivisa in Spain, and Empaque in Mexico.
This is also a time when Ball is flush with cash and borrowing power. Its stock has been attracting investors, outpacing the recent performance of both Crown and Rexam.
In Ball’s 2014 results, sales were up 1.2 percent to $8.57bn, and net profit up by 14.5 percent to $498m. Cash increased to more than $600m. To fund the Rexam acquisition, Ball is taking out an unsecured loan of $3.3bn, obtaining $3.0bn in revolving credit and raising $2.2bn in new equity.
Rexam is now dedicated to manufacturing two-piece beverage cans, having divested interests in plastics packaging, cosmetics containers and glass products over the past decade. Its global beverage can volumes are more than 60 billion a year, on a par with Ball.
But Rexam stock had been badly battered since its chief executive Graham Chipchase, in his Q3 interim management statement, highlighted headwinds that it would face in the remainder of 2014 and in 2015. They include the following: aluminium warehouse premiums of an additional $45 million in 2015 (see The Canmaker, January 2015).
In addition, Rexam has exposure in Russia with its major customer Carlsberg announcing that it is shutting two plants, implying that it may be hard to reach earlier year volume gains and profitability in 2015. Other issues disclosed by Rexam in 2014 include margin problems in Egypt and Turkey. Then the plant in India, while growing in output, was struggling to reach corporate margins, though Rexam has announced plans to build a second plant and buy land for a third. Finally, the company is expected to face higher power costs in Brazil because of the drought in 2014 and 2015. None of these issues jeopardizes the company and some were also faced by its competitors, especially those involving hydro-power costs in Brazil and aluminium warehouse premium escalation. Foreign exchange translation is also costly, but hardy unique to Rexam.
Nevertheless, at the 2014 year end the company reported good overall results with can volumes and organic sales up by 4 percent. The drop in overall sales to £3.83bn ($5.9bn) followed the sale earlier in the year of its healthcare business for £450m, which was passed on to shareholders. Even in the post-FIFA World Cup period, operating profit, margins and outlook were not out of line with those of Ball and Crown (see The Canmaker, December 2014). Yet several analysts downgraded Rexam and its earlier image seemed tarnished, though the reasons seem murky, reflecting the quixotic actions in the stock market.
That said, a Rexam acquisition by Ball will not be easy to accomplish. In North America, the combined operations would account for some 60 percent of the total supply of 94 billion cans a year, as shown in the table and graphics. This means there will have to be divestitures to satisfy the US anti-trust authorities, including the Department of Justice (DOJ).
In Europe overall the combined share would be about 70 percent, though it differs by country, but the threshold for action on anti-monopoly rules is lower. Richard Moore, a consultant in the packaging industry who was formerly business development manager at Impress and Ardagh, says that Ball was not able to acquire all of the Metal Container Corp plants in the US because it would have given it a market share above 50 percent.
In Europe, Moore says that the threshold could be in the order of 45 percent. If so, Ball in the US would have to divest itself of at least 10 percent of the projected volume, or about 8-9 billion cans, and 20 percent of volume in Europe subject to EU anti-monopoly rules. This may shield Rexam’s plants in Scandinavia and its large new plant being built in Switzerland that will make cans for Red Bull, and of course its plants in Russia, Turkey, Egypt and Saudi Arabia.
In a conference call following Ball’s bid, chief executive John Hayes played down the impact of the potential anti-trust issues, and emphasized the benefits of supply chain efficiencies of, for example, one beverage can plant supplying a customer rather than two. Of the expected $300m yearly savings, 44 percent will come from administration, 32 percent from sourcing items such as metal, 22 percent from logistics and warehousing, and just 2 percent in manufacturing processes and the use of best practice in plants.
Nonetheless, there is an agreement that if more than $1.58bn-worth of divestments have to be made in North America and Europe, it will be a deal breaker.
While the necessary divestment negotiations will be indeterminate, so will the likely beneficiaries. Will they be canmakers – Can-Pack has been touted as a possible buyer – or private equity?
There is little doubt that there is some tax saving involved in the proposed transaction. Ball recorded a tax provision of $150 million in 2014 on earnings before taxes of $646 million, a tax rate of 23.2 per cent. Rexam in the first half of 2014 had tax provision of 25.3 percent. It is possible that there may be some further savings from the statutory rate.
But on balance, tax savings are a subsidiary factor. The big driver is clearly synergies, and the ability of the combined enterprise – its sales are estimated to be more than $14 billion – to negotiate prices and terms with both metal suppliers and major beverage customers on a more equal footing.
MCC 0% 15%
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