Rank Unit Reynolds Buys Graham Packaging for $1.68 Billion; Silgan Yields

Reynolds Group Holdings Ltd., the packaging company owned by New Zealand billionaire Graeme Hart, agreed to acquire Graham Packaging Co. for $1.68 billion, beating Silgan Holdings Inc. (SLGN) for the plastic-container maker.

Reynolds, a unit of Hart’s Rank Group Ltd., will pay Graham investors $25.50 a share, 50 cents more than its June 13 bid, York, Pennsylvania-based Graham said today in a statement. That’s equal to about $4.5 billion with the assumption of Graham’s debt. The purchase will be financed with cash and as much as $5 billion of new debt, Auckland-based Reynolds said separately.

Hart, New Zealand’s richest man, gains a plastic-container company with customers such as PepsiCo Inc., maker of Gatorade and Tropicana beverages. The 56-year-old former truck driver who amassed a fortune investing in businesses from lumber to dairy is adding to more than $13 billion of packaging acquisitions he completed since 2006.

“This guy has never lost a bidding war in 20 years,” Ghansham Panjabi, a Roseland, New Jersey-based analyst at Robert W. Baird & Co. who rates Graham shares “neutral,” said today in a telephone interview. “They want to be a multi-solution provider to their customers and they are driving it by increasing their product portfolio.”

‘A Disappointment’

Graham fell 53 cents, or 2.1 percent, to $25.20 at 4:15 p.m. in New York Stock Exchange composite trading. Silgan rose $1.14, or 2.9 percent, to $40 on the Nasdaq Stock Market.

Investors this week were betting Graham would sell for $26 to $27 a share, said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania.

“It’s a bit of a disappointment from my perspective that it wasn’t higher,” Polley said in a telephone interview.

Reynolds said it agreed to boost the purchase price by 2 percent because Blackstone Group LP (BX), which owns 61 percent of Graham, agreed to the transaction, negating the need for approval from other shareholders. Blackstone, the world’s largest private-equity firm, sold some shares of the packaging company to the public in February 2010 for $10 each.

Reynolds is paying about 9 times Graham’s earnings before interest, taxes, depreciation and amortization. That compares with a median multiple of 8.2 in six North American packaging deals in the past five years, according to data compiled by Bloomberg.

Higher Multiple

Reynolds can justify paying a higher multiple because financing costs have dropped in recent years, Panjabi said. Reynolds’ larger plastic-packaging portfolio also allows it to extract more cost savings than would have been available to Silgan, which primarily makes metal cans and closures, he said.

Silgan, based in Stamford, Connecticut, had agreed to pay 0.402 of a share and $4.75 in cash for each share of Graham. That equals $20.83 a share, or $1.37 billion, based on Silgan’s closing price. Reynolds’ all-cash bid was superior even after Silgan proposed new terms in recent days, Graham said in its statement.

“It’s a very difficult thing to win with cash and stock versus all cash,” Bill Kavaler, a special-situations analyst at Oscar Gruss & Son Inc., said today in a telephone interview from New York. Reynolds is “willing to run with a lot more leverage, which they can do because they don’t have public stockholders to whine at them,” he said.

Silgan said in a separate statement that is it entitled to a termination fee of $39.5 million for the cancellation of its April 13 buyout agreement.

Packaging Deals

Hart’s wealth was estimated at $5.5 billion in March by Forbes magazine, ranking him at No. 185 in the world with six others and No. 1 in New Zealand. Since acquiring Pactiv Corp., the maker of Hefty trash bags, for $4.5 billion in November, Hart’s closely held Rank has added Honeywell International Inc.’s car-care products unit for $950 million and UCI International Inc. from Carlyle Group for $375 million.

With Graham, Hart’s Reynolds unit adds container customers that include Procter & Gamble Co.’s Gain detergent, H.J. Heinz Co.’s ketchup, and Coca-Cola Co.’s Minute Maid juice.

After the deal closes, which is expected in the second half, Reynolds will pay Blackstone and the Graham family $245 million in cash because of previous income-tax receivable agreements. The payment is compensation for net operating losses from prior years that Graham’s owners can use to reduce future tax liabilities, Panjabi said.

Calculations for the offer values are based on 65.7 million Graham shares outstanding on April 25, according to data compiled by Bloomberg.

To contact the reporters on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net.

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net.

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