Silgan Completes Asset Buy - Analyst Blog

By Zacks | September 05, 2012 AAA

 

Silgan Holdings Inc. (SLGN) has completed the acquisition of the plastic thermoformed food business of Rexam PLC. The value of the transaction, including post closing adjustments, was $248.1 million.
 
The new business unit, producing barrier and non-barrier bowls and trays for the shelf-stable food markets, will operate as Silgan Plastic Food Containers. It will be incorporated within the plastic container segment of Silgan.
 
Silgan used cash on hand to buy the assets. It is expected that the plastic thermoformed food business will be accretive to its earnings in 2013 but neutral in 2012. Silgan anticipates that the business would generate revenues of nearly $100 million in 2012.
 
Silgan inked the deal to buy assets from Rexam in July this year with a view to expanding in the growing food packaging market. With this acquisition, Silgan strengthened and diversified its product offering, meeting the demands of a wider client base.
 
The technology involved being cost effective, meets the exact requirements of the shelf-stable food market at low costs. Therefore, it is expected that the products of the new business unit will be widely accepted by the existing customers as well as potential new customers of the company.
 
Silgan has grown primarily through acquisitions since its inception. The company has increased its overall share in the U.S. metal food container market to more than 50% either through acquisitions or organic growth.
 
However, Silgan's inability to identify suitable targets at attractive valuations could impede its growth. Moreover, its debt-to-capitalization ratio is a concern. The debt-to-capitalization ratio went up to 73% in second-quarter 2012 from 70% a year ago. Its strategy to look for acquisitions will further aggravate the debt position.
 
In addition, the soft demand conditions in Europe are expected to weigh on volumes and pricing moving ahead. Silgan also faces stiff competition from companies like Ball Corporation (BLL) and Crown Holdings Inc. (CCK).
 
Silgan retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.
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