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Silgan Holdings Inc. (SLGN) has outlined terms to raise debt up to $4.5 billion to fund the acquisition of Graham Packaging Company Inc. (GRM).   As disclosed in its regulatory filing, Silgan has entered into an agreement with Bank of America Corporation (BAC), under which an aggregate of $4 billion will be made available to Silgan through the following - a $ 900 million Term A loan maturing in 6 years, a $2.3 billion Term B loan with a maturity period of 7 years and a $800 million five-year revolving credit facility.

In addition, Silgan will also receive a bridge loan of up to $500 million backing a notes offering. The company can also increase its borrowing capacity under the credit agreement by as much as $750 million.

Silgan's term loan A and revolver will carry an interest rate 2.5 percentage points more than the London interbank offered rate (Libor) and the Term loan B will charge an interest margin of 3.25 percentage points more than Libor.

The revolving facility will charge a 0.5% fee on the unused portion of the credit line. Silgan's bridge loan will have an initial margin of 5.5 percentage points over Libor. The margin will increase by 0.5 percentage point every three months for as long the bridge loan is outstanding.

The term loan A will be subject to  annual repayment beginning December 31, 2013, of principal in amounts to be agreed upon. The term loan B will be subject to annual repayment commencing December 31, 2012, of principal equal to 1% of the aggregate with the balance payable at maturity.

Silgan had announced last week its definitive agreement to acquire Graham Packaging, for approximately $4.1 billion, including debt. Graham Packaging is a leading global supplier of value-added rigid plastic containers for the food, specialty beverage and consumer products markets.

As per the offer, Graham shareholders will receive 0.402 shares of Silgan and $4.75 in cash for each share of Graham, representing a total enterprise value, including net debt, of approximately $4.1 billion.

The acquisition will fortify Silgan as a premier food and specialty beverage packaging company with annual sales of over $6.2 billion and 180 manufacturing facilities across 19 countries. Silgan expects the acquisition to be accretive to earnings and cash flow per share in the first full year.

Silgan expects to realize operational cost synergies of $50 million by the third year following the combination. These synergies will be achieved primarily through reductions in administrative expenses, procurement savings and a more efficient manufacturing cost structure.

The deal has been approved by both Silgan's and Graham's boards of directors. The acquisition is currently expected to close in the third quarter of 2011, subject to the approval by both the companies' shareholders, regulatory bodies and other customary closing conditions.

Silgan is currently the largest manufacturer of metal food containers in North America and controlled approximately half of the U.S. market in 2010. Silgan has increased its sales and market share through acquisitions as well as internal growth and, in the process, expanded and diversified its customer base, geographic presence and product lines.

The Graham packaging acquisition will enhance Silgan's ability to cater to the important markets of food, specialty beverage and consumer products, which are known for their stable demand with large, growing multi-national customers with multiple rigid packaging options.

On the flipside, Silgan's debt-to-capitalization ratio deteriorated to 62% as of December 31, 2011 from 54% as of December 31, 2009. Debt incurred to fund the Graham acquisition and assumption of Graham's debt will further aggravate Silgan's debt position.

Margins also remain under pressure given the inability to pass through higher raw material costs and the added burden of escalating interest rates emanating from the loaded debt levels. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

Silgan is a leading manufacturer of consumer goods packaging products, operating 68 manufacturing facilities in North and South America, Europe and Asia. In North America, Silgan is the largest supplier of metal containers for food products and a leading supplier of plastic containers for personal care products.

In addition, Silgan is a leading worldwide supplier of metal, composite and plastic vacuum closures for food and beverage products. It operates through three segments, namely Metal Food Containers, Closures and Plastic Containers. Silgan competes with the likes of Ball Corporation (BLL), Crown Holdings Inc. (CCK) and privately held Berry Plastics Corporation.

 
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