(Reuters) - U.S. drinks can maker Ball Corp (BLL.N) agreed to buy British rival Rexam Plc REX.L in a sweetened 4.43 billion pounds ($6.9 billion) deal, creating an industry giant that can better manage capital spending and costs as aluminum premiums rise.
The cash-and-stock deal would merge the world’s two largest beverage can makers by volume into a combined entity that could serve as a single supplier to customers across diverse markets.
It would also reduce warehousing and transport costs for the can makers, which are contending with record-high premiums, the surcharge they must pay to traders on top of cash metal prices to obtain aluminum.
“If you want global supply and global prices, you need a Rexam plus Ball, because neither Rexam nor Ball individually are global,” said Jefferies & Co analyst Sandy Morris.
Shares of Rexam, which makes cans for Coca-Cola Co (KO.N) and Anheuser-Busch InBev SA (ABI.BR), rose more than 6 percent to 571.5 pence in early trading before falling back, and were significantly below the indicated price of 628 pence per share.
Though analysts said the offer price was fair given challenges in the global packaging industry, they said antitrust concerns were limiting stock gains. Ball shares fell about 2 percent.
“As there are so many regulatory approvals required for such a merger to go through, I think the market is discounting the probability of it happening,” said Thomas Picherit of research firm AlphaValue.
Rexam and Ball each control slightly more than a fifth of the global market. Their nearest competitor, Crown Holdings Inc (CCK.N), has a 19 percent share, according to Vertical Research Partners.
Together, Rexam and Ball account for 60 percent of beverage can supply in North America, 69 percent in Europe and 74 percent in Brazil, according to Morningstar analysts.
If regulators demand the divestment of assets, Crown would be the front runner to buy them, three analysts said. Crown could not immediately be reached for comment.
But Rexam Chief Executive Graham Chipchase said he did not expect the deal to encounter any significant regulatory hurdles.
“If you look at the two businesses combined, there’s a very complementary footprint,” he said on a media call. “There’s not as much overlap as you might think.”
Rexam, which on Thursday reported lower 2014 sales, has a big presence in Scandinavia, Russia and India. Ball has a strong foothold in China.
Ball can walk away from the deal if required to divest assets that generate sales of more than $1.58 billion, but the company would have to pay a break-up fee of about 300 million pounds, roughly 7 percent of the deal value.
Ball executives, speaking on a different conference call, said it was premature to assume divestments would be required. The company said it expects clearance by the first half of 2016.
Broomfield, Colorado-based Ball said it expects the deal to result in synergies of $300 million by 2018.
The company will finance the deal, which values Rexam at $8.4 billion including debt, using a 3.3 billion pounds bridge loan, a $3 billion revolving credit facility and $2.2 billion of new equity.
Ratings agency Moody’s said this month that a debt-financed deal could result in downgrades for Ball’s $3.8 billion of rated debt.
Ball, a company started by five brothers in 1880, retained Axinn, Veltrop and Harkrider as lead antitrust advisors on the deal.
Rexam shareholders will get 407 pence in cash and 0.04568 new Ball shares for each Rexam share held. Rexam shareholders will own about 19 percent of Ball’s shares.
Ball said it would remain domiciled in the United States, shunning the tax inversion model in vogue last year, when some big U.S. companies bought out UK-listed firms to try and lower their corporate tax payments.
Greenhill, Deutsche Bank and Goldman Sachs were financial advisers to Ball. Rothschild, Barclays, Credit Suisse and Merrill Lynch International were Rexam’s advisers.
Skadden, Arps, Slate, Meagher & Flom was lead legal adviser to Ball, while Freshfields Bruckhaus Deringer LLP advised Rexam.
Editing by Gopakumar Warrier and Vincent Baby