We reiterate our Neutral recommendation on Silgan Holdings Inc. (SLGN), a leading manufacturer of consumer goods packaging products, operating 68 manufacturing facilities in North and South America, Europe and Asia. Silgan’s fourth quarter and fiscal EPS topped the Zacks Consensus Estimates while revenues for both the periods fell short of the Zacks Consensus Estimates.
Silgan has increased its overall share in the U.S. metal food container market from approximately 10% in 1987 to the current market share of approximately 50% through acquisitions and organic growth. Silgan estimates that in 2011 approximately 90% of its projected metal food container sales in North America, the majority of its projected closures sales in the United States and most of its projected plastic container sales will be under multi-year customer supply arrangements.
Silgan’s growth since its inception was primarily driven by acquisitions. Besides the metal food container business, Silgan strengthened its position in the plastic container and closures businesses through strategic acquisitions.
In November 2010, Silgan broadened its closures business through the acquisition of IPEC Global Inc., or IPEC, a leading plastic closure manufacturer serving primarily the North American dairy and juice markets. In March 2011, Silgan completed the acquisition of the food can business of Vienna, Austria-based Vogel & Noot Holding for 250 million euros (approximately $358.8 million). With this acquisition, Silgan is a leading manufacturer of metal containers in North America and Europe.
Based on the continued strength of its balance sheet, Silgan continues to seek opportunities for growing the business through acquisitions. Silgan recently entered into a definitive agreement to acquire Graham Packaging for approximately $4.1 billion, including debt. Silgan expects the acquisition to be accretive to earnings and cash flow per share in the first full year. The acquisition will establish Silgan as a premier food and specialty beverage packaging company.
To analyze the company’s possible pitfalls, its growth through acquisition strategy has inherent risks. The company’s inability to locate and acquire suitable businesses in future will hamper its growth rate. Moreover, Silgan’s high dependence on acquisitions for growth could prove problematic if it fails to raise the required capital.
Silgan has outlined terms to raise of debt up to $4.5 billion to fund the acquisition of Graham Packaging Company Inc. As of December 31, 2010, Silgan’s debt-to-capitalization ratio deteriorated to 62% from 54% as of December 31, 2009. As per the merger agreement Silgan will also assume Graham’s debt. This 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 interest emanating from the higher debt levels. We thus maintain our Neutral recommendation backed by a short term Zacks #3 Rank (Hold).
Silgan competes with the likes of Ball Corporation (BLL), Crown Holdings Inc. (CCK) and privately held Berry Plastics Corporation.
BALL CORP (BLL): Free Stock Analysis Report
CROWN HLDGS INC (CCK): Free Stock Analysis Report
SILGAN HOLDINGS (SLGN): Free Stock Analysis Report
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