Silgan wraps up $1.3 billion Graham Packaging buy

BANGALORE (Reuters) - Silgan Holdings Inc (SLGN.O), which makes cans for Campbell's Soup, is to buy smaller rival Graham Packaging GRM.N for $1.3 billion in cash and stock, as it looks to bolster its plastic packaging business.

The deal, worth $4.1 billion including debt, comes at a time when rising metals prices are making plastic the packaging material of choice, fast replacing tin and aluminum.

Analysts expect more consolidation among packaging companies with strong balance sheets and good cash flow, and predicted M&A would be further driven by the shift from metals to plastics.

Silgan competes against bigger rivals such as Ball Corp (BLL.N) and Crown Holdings Inc (CCK.N), which mainly produce metal packaging products, and Sonoco (SON.N) and Bemis (BMS.N) which have sizeable plastic packaging businesses.

"The plastic packaging space is less consolidated so there's more scope for M&A," said Macquarie Research analyst Albert Kabili, noting Sonoco could look to add some niche plastic packaging to compliment its consumer packaging business.

Silgan's acquisition comes days after private equity firm Blackstone (BX.N), which holds a 61 percent stake in Graham, received European Union approval to buy Spanish food can maker Mivisa MIVIS.UL from CVC CVC.UL.

"Silgan's plastic business is about one-fifth the size of Graham's ... and the rigid plastics sector needs more consolidation; so Silgan either had to sell or get meaningfully bigger," said Robert W. Baird analyst Ghansham Panjabi.

Shares of both companies hit life highs in heavy trading on Wednesday. Silgan shares were up 16 percent on Nasdaq, and Graham rose 29 percent to $21.56 on the New York Stock Exchange.

Graham, which had 2010 sales of $2.5 billion, makes custom blow-molded rigid plastic containers for consumer products makers such as H.J. Heinz, Kraft Foods, Unilever and Coca Cola.

The deal will add manufacturing facilities in the Americas, Europe and Asia, and create a company with annual sales topping $6.2 billion.

Silgan, which has a long-term debt-to-equity ratio of 1.61,

will assume heavy debt with the deal, but analysts played down any concern.

"Silgan has always had a lot of debt on its balance sheet. They've been very comfortable running with a significant amount of leverage, so I don't think that's something to be excessively worried about," Panjabi said.

PACKAGING THE DEAL

Graham shareholders will receive $4.75 in cash per share and 0.402 shares of Silgan common stock. The offer is valued at $19.56 per share, a premium of 17 percent to Graham's Tuesday close.

As of Tuesday's close, Graham's shares traded at a forward earnings multiple of 9.65 times, while Silgan's offer values the stock at more than 11 times forecast earnings.

Stamford, Connecticut-based Silgan said the deal would generate about $500 million in free cash flow, or about $5 per share, and would add to earnings in the first full year after completion, expected in the third quarter.

Silgan expects to cut operational costs by $50 million by the third year following the deal.

Since 1987, Silgan has bought 25 businesses, boosting its U.S. metal food container market share to around 50 percent.

BofA Merrill Lynch acted as financial adviser to Silgan. JPMorgan Securities advised Graham.

(Reporting by Megha Mandavia and Divya Sharma; Editing by Saumyadeb Chakrabarty and Ian Geoghegan)