Silgan Packs Away Another Deal

By Stephen D. Simpson, CFA | April 14, 2011 AAA

Investors likely don't give much of a thought to packaging companies, unless it is to consider the ramifications of scare-stories like the presence of bisphenol A (BPA) in food cans. After all, this is just a commodity business with low growth potential, right?

Well, maybe not. It's absolutely true that packaging is not exciting from a growth perspective, but there is a lot to be said for an industry with customer-supplier relationships measured in decades of years, consistent margins and cash flow and consolidation potential. With that in mind, the deal between
Silgan (Nasdaq:SLGN) and Graham Packaging (NYSE:GRM) becomes a little more interesting.

Tutorial: The Basics Of Mergers And Acquisitions

Terms of the Deal
Silgan has long been an active acquirer, doing over 25 deals in the last 25 years, but Wednesday's deal for Graham is a whopper by past standards. Silgan is acquiring this plastic packaging specialist in a deal worth $4.1 billion based upon the pre-deal values of the respective stocks.

Silgan is paying considerations valued at $19.56 per share (again, based on Tuesday's closing prices), a 17% premium to Graham's prior close. Silgan is offering shareholders a mix of compensation - $4.75 in straight-up cash and 0.402 shares of Silgan stock. Because of that sizable chunk of stock, the real value of the deal is going to move around prior to the close of the deal. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

What Silgan Is Getting
Acquiring Graham is all about folding in a quality player in the plastic packaging space. Silgan is a major player in metal food cans, boasting long relationships with major food companies like Campbell (NYSE:CPB), Nestle (Nasdaq:NSRGY) and Del Monte (NYSE:DLM). Silgan also does have a closures business and a plastic containers business, but Graham is going to increase the scale of that latter business considerably.

Like Silgan, Graham is largely focused on the food (and beverage) markets - getting more than 60% of its revenue from food clients like PepsiCo (NYSE:PEP), Coca-Cola (NYSE: KO) and Danone. In fact, Graham is a market leader in many of its businesses, including packages for yogurt products.

There should be good synergy in this deal, though, as most of Silgan's plastics business is in personal care products (lotions, shampoo, etc.), while that is a smaller business for Graham. So not only does this bring new customers to Silgan, it gives them the chance to sell more product to existing customers and potentially displace rivals like Ball (NYSE:BLL) and Amcor.

Should Investors Open This Up?
Silgan has posted shockingly consistent operating margins over the years, with an attractive upward trend. Likewise, revenue growth has been pretty consistent over the course of time. This deal would not seem to imperil any of that, and should give the company the opportunity to wring some cost-cutting benefits out of the combined systems. (For more, see Analyzing Operating Margins.)

Much as it seems like a cheap-shot to invoke Warren Buffett and Berkshire Hathaway (NYSE:BRK.A) when discussing value ideas, I have to say that there seem to be some Buffett-ish qualities to this name. It's a dull business, but it is a reliable one that is relatively easy to understand and this acquisition of Graham should help mitigate the risks Silgan faces from migrations away from metal containers. Likewise, it is a consistent cash flow generator that could likely benefit from cheap capital. That, and the exposure to commodity inputs makes it seem not too dissimilar to business like floor care and building materials, areas where Buffett has made large purchases in the past.

The Bottom Line
Figuring the additional cash flow and subtracting the dilution from extra shares and debt, this looks like a value-additive deal. Wall Street would seem to agree, as Silgan's shares are up over 10%, and that's not too common with premium buyout deals. What's more, Silgan shares look cheap enough to be worth a serious look. This is no doubt a dull, low-growth industry but value is value and this could be a stock that pays patient investors to wait. (For more, see The Value Investor's Handbook.)


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