Rexam, British drinks can manufacturer, has accepted a £4.4 billion takeover offer from US rival Ball Corporation. The deal will result in Rexam shareholders owning 19 per cent of the world’s largest beverage can maker after receiving 407 pence in cash and 0.045 new shares for every share they own.
The £4.4 billion offer represents a 40 per cent premium to Rexam’s closing share price at the beginning of February, when speculation of a takeover first arose. Shares of Rexam, which makes cans for Coca-Cola, Pepsi and Red Bull, rose more than 6 per cent to 571.5 pence in early trading. Ball shares fell about 2 per cent.
By joining forces, this takeover will create an industry giant that can better manage capital spending. Warehousing and transport costs, rising aluminium prices, as well as foreign-exchange volatility are of particular concern to Rexam and Ball. This deal will achieve close to £200m of synergies by 2018, by way of cutting costs in areas such as administration, sourcing and logistics.
The cash-and-stock deal will be good news to soft drinks companies such as Coca-Cola and Pepsi, who can achieve greater economies of scale by agreeing to a single supplier deal to cover diverse markets. The merging of packaging companies to create a global platform is a popular trend. In November, Coca-Cola and SABMiller agreed to form a new company in order to merge their non-alcoholic bottling operations in Africa.
Analysts have expressed concern that the deal could run into regulatory problems. EU and US competition regulators are concerned by their combined global concentration of market share. At present, Rexam and Ball respectively control just over 20 per cent of the global market. According to Morningstar, this takeover will create a combined entity that will control over 60 per cent of the market spanning North America, Europe and Brazil.
Significant divestures may therefore be required in order to appease regulators. The two companies have stated their willingness to dispose of assets worth up to approximately £1 billion. If they are required to make any further disposals, Ball has warned it will retreat from the deal. Their nearest competitor, Crown Holdings, would be the most likely contender for these assets. According to Vertical Research Partners, Crown currently owns 19% of the market share.
Rexam have secured a break fee worth £302 million, 7 per cent of the deal value, if the takeover falls apart. Ball’s offer is designed to protect Rexam’s shareholder losses and inspire confidence that this deal can navigate regulatory hurdles. Ball shareholders cannot be offered a break fee under UK takeover law.
Due to the lengthy competition approval process, the deal is unlikely to close until the first half of 2016.
Rexam Financial Advisers: Rothschild, Barclays, Credit Suisse and Bank of America Merrill Lynch
Rexam Legal Adviser: Freshfields Bruckhaus Deringer LLP
Ball Financial Advisers: Greenhill, Deutsche Bank and Goldman Sachs
Ball Legal Advisers: Skadden, Arps, Slate, Meagher & Flom and Axinn, Veltrop and Harkrider LLP.