The negotiations are over. The deal has been finessed (ok, sweetened). Ball Corporation has agreed to buy Rexam in a cash-and-stock deal worth 4.43 billion pounds ($8.7 billion). The boards of directors of both companies unanimously support the transaction.
In addition, the US drinks can maker will provide a Mix and Match Facility, which will allow Rexam shareholders to elect, subject to offsetting elections, to vary the proportions in which they receive new Ball shares and cash.
Following closing of the transaction, Ball will remain a New York Stock Exchange listed company with its home in the US.
Why would the top largest can makers by volume unite?
1. Individually, neither Rexam nor Ball is global.
2. The new company can better manage capital spending and costs as aluminium premiums rise. These surcharges that they must pay to traders on top of cash metals prices in order to obtain aluminium are already at a record high.
3. The new company will be able to serve as a single supplier to customers across diverse markets.
4. It will reduce warehousing and transport costs.
The stock market seems to be unconvinced that the merger will happen. Analysts agree that the offer price is fair, but antitrust concerns made Rexam’s share price rise 6% and then fall back, and Ball’s shares fall 2%.
Rexam chief executive, Graham Chipchase, stated in a media call on 19 February, that 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. There's not as much overlap as you might think."
Rexam’s home is in the UK. It has a large presence in Scandinavia, Russia and India. 30% of its sales come from emerging markets. Ball’s home is the US and it has a large presence in China.
Rexam and Ball each control slightly more than a fifth of the global can market. Their nearest competitor, Crown Holdings, has a 19% share, [Vertical Research Partners]. Together, Rexam and Ball account for 60%-74% of beverage can supply depending on region.
If regulators demand the divestment of assets, Crown is likely be the front runner to buy them.
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 ($589 million), about 7% of the deal value.
Ball has stated that it expects clearance by the first half of 2016.
“The combination of Ball and Rexam creates a global metal beverage packaging supplier capable of leveraging its geographic presence, innovative products and talented employees to better serve customers of all sizes across the globe, while at the same time generating significant shareholder value,” stated John A. Hayes, chairman, president and chief executive, Ball Corporation since January 2011.
“Today’s announcement aligns with our Drive for 10 strategic vision of maximising value in our existing businesses, expanding into new products and capabilities, aligning ourselves with the right customers and markets, broadening our geographic reach and leveraging our know-how and technology. Once successfully closed, we expect the combination will provide $300m of annual run-rate, value creating synergies in the areas of general and administrative, sourcing, freight and logistics and process and efficiency savings which are additive to our long-standing financial strategy of growing diluted earnings per share 10% to 15% over time, generating significant free cash flow and growing EVA dollars.”
Stuart Chambers, chairman, Rexam, said, “The Rexam board believes that the proposed combination with Ball is a compelling opportunity for our stakeholders. By combining the two companies, we will create a truly global platform to deliver best-in-class service to customers based on a shared culture of manufacturing excellence and continued innovation. The proposed transaction offers our shareholders an attractive premium and an opportunity to participate in the value creation of the combined group through ownership of Ball shares.”
Scott C. Morrison, senior vice president and chief financial officer, said Ball’s existing strong free cash flow coupled with the free cash flow of Rexam will allow the new company to pay down debt aggressively after closing.
“Given the cash generative capabilities and the (US)$300 million of annual run-rate synergies of today’s proposed transaction, we expect to maintain a solid credit profile after this transaction is complete. Our pro forma leverage will be approximately 4.5 times net debt to EBITDA following this transaction, a level similar to our leverage following the Reynolds Metals transaction, when we were a much smaller company. Once we have reduced the leverage to levels in the range of 3.0 times net debt to EBITDA, the company will re-initiate its share repurchase program, and we are targeting 2018 for that.”
