With crude oil fetching lofty prices, major U.S. companies are pulling out of the plastics business. General Electrics (GE) and now Owens-Illinois (OI) have sold plastics divisions in recent weeks. Despite declining profits, the companies found buyers willing to pay more than many expected.
Oil costs are "definitely having an impact on the industry," says Stewart Scharf, an equity analyst at Standard & Poor's. With oil near $66 a barrel, the cost of raw materials are cutting into profits. The higher costs are also sapping demand, Scharf says.
First, General Electric sold its plastics division to Saudi Basic Industries Corp. last month. With their easy access to oil, the Saudis were willing to pay $11.6 billion for the business.
Now, Owens-Illinois said June 11 it has sold off its plastics packaging business to Rexam PLC, a British concern, for $1.825 billion. Rexam says the acquisition will transform its existing plastics offerings, and could offer $40 million in cost savings.
Shares of Owens-Illinois fell 1.9% to $32.65 in NYSE trading June 11.
Owens-Illinois' plastics division had revenues of about $760 million in 2006, with profits of about $114 million. It specialized in health care packaging and closure and specialty products. Its 2,800 employees work at 19 facilities in the U.S. and abroad.
Owens-Illinois' plastics business was hurt by higher costs and lower demand, Scharf says, but it had other reasons for the sale. The proceeds will help Owens-Illinois pay down a heavy debt load, built up through acquisitions and years of expensive asbestos litigation. Cancer-causing asbestos has resulted in about 18,000 lawsuits and claims against the firm, Scharf says. Also, the sale lets Owens-Illinois focus on its specialty, glass.
"This sale and the subsequent debt reduction will give us greater operating flexibility and allow us to better focus resources to improve our core glass business," Al Stroucken, the company's chairman and CEO, said in a statement.
The deal wasn't a surprise. Owens-Illinois hired an investment banker earlier this year, and Rexam confirmed it was interested last week.
Still, the purchase price was higher than many analysts expected. The deal was rumored at $1.5 billion, not the $1.825 billion announced on Monday. That's "almost 2.4 times sales, so I think they got a fair price," says S&P's Scharf. (S&P, along with BusinessWeek, is a unit of the McGraw-Hill Companies.)