LONDON Rexam (REX.L) agreed to buy the plastic packaging business of Owens-Illinois (OI.N) for $1.83 billion (93 billion pounds) in cash as it targets the fast-growing market for packaging medicines.
Rexam, the world's biggest can maker, said on Monday it would place 58.35 million new shares, or 9.99 percent of its existing share capital, to help pay for the deal. That would raise around 300 million pounds at Friday's closing price of 511-1/2 pence.
It is also raising 500 million euros equivalent through a bond issue, one of the banks managing the sale said.
Rexam hopes the purchase of O-I Plastics will help it ride a boom in the plastic packaging market, where the $4 billion U.S. market is expanding 7 percent annually as an ageing and healthcare-conscious population uses more medicines.
Rexam, which said on Friday it was in talks with Owens-Illinois, expects the acquisition to meet its cost of capital in 2009 and to be modestly earnings enhancing in 2008.
The effective acquisition cost of $1.57 billion, after excluding $260 million in tax-related charges, represents 2.1 times 2006 sales and 13.7 times 2006 underlying profit, Rexam said.
"This transaction is fully in line with Rexam's strategy to expand our position in core markets," Rexam Chief Executive Leslie Van de Walle told reporters.
"It gives us meaningful scale in plastics, leading market positions in core growth markets and is anticipated to create significant value through synergies and cross-selling opportunities."
Rexam said it expected to have cost and revenue synergies of around $40 million per year by 2010. It expects integration costs of $20 million and capital investment in new IT systems of $25 million in 2007 and 2008.
By 9:10 a.m., shares in Rexam shares were down 3.1 percent at 495-1/2 pence, having fallen as low as 492p -- their lowest since early March.
"The deal ... reflects the pattern of consolidation both in Europe and globally which is being undertaken by the stronger players," Nick Spoliar, analyst at brokerage Bridgewell.
"The acquisition at two times sales ... is nonetheless a bold move for Rexam and shows their ambitions to be a global player in rigid plastics as they are in cans."
Brokerage Seymour Pierce also said the price was at the top end of the range it had expected, although the new equity funding was in the middle of the range.
"At the price paid, the deal will only just be earnings enhancing in 2008... Given the weak outlook for the current year, it appears shareholders are in for a long wait," it said.
Rexam will pay for the deal, which is expected to be completed in the third quarter, through a hybrid bond issue raising 500 million euros equivalent, one of the banks managing the sale said, and from the proceeds of the sale of its glass unit which Rexam said in March it would sell for 660 million euros.
O-I Plastics, whose healthcare packaging customers include Pfizer Inc (PFE.N), Bausch & Lomb Inc BOL.N, Bristol Myers Squibb Co (BMY.N), had revenue of about $760 million and underlying profit of $114 million for the year to end-September 2006.
O-I Plastics, headquartered in Perrysburg, Ohio, makes rigid plastic healthcare packaging and plastic closure systems which also provide companies such as PepsiCo (PEP.N), Coca-Cola (CCE.N), Nestle (NESN.VX) and Procter & Gamble (PG.N) with closures for fizzy drinks, water and food.
More than 90 percent of O-I Plastics' sales and profits are generated in the U.S. market, while Rexam's healthcare packaging base is mainly focused on Europe, the United States and India.
O-I said it would use the sales proceeds to reduce debt.
Credit Suisse is acting as financial adviser to Rexam on the acquisition and Goldman Sachs as financial advisor to O-I. ABN AMRO Hoare Govett and Citigroup are acting as joint bookrunners and brokers to Rexam's share placing.
(Additional reporting by Nick Zieminski in New York)