#rexam plc

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Ball Corporation In Talks To Acquire Rexam Plc On February 5th, 2015, Rexam Plc confirmed that it is in talks with Ball Corporation to be acquired. Company confirmed that an indicative offer of GBP 6.10 is on the negotiation table and the transaction is expected to be financed with two thirds in cash and one third in Ball Corporation's stock. According to takeover code rules, Ball Corporation has, by March 5th, 2015, to announce a firm intention to make an offer or announce that it does not intend to make one. Company profile Rexam is a global manufacturer of beverage cans, the vast majority of which are made of aluminium. Company manufactures a broad range of can sizes for products such as carbonated soft drinks, beer, energy drinks and other drinks categories. Rexam makes approximately 62 billion cans a year at 55 plants on five continents and employs around 8,000 people. Rexam is a business partner to some of the world's most famous and successful consumer brands. In 2013 sales were GBP 3.9 billion. Rexam is a member of the FTSE 100 Index. Takeover gambles Overall, one should not gamble on such market speculations. The majority of buyout rumors are not followed by actual transactions. According to data compiled by Bloomberg, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010. A total of 104, or only 14.5 percent, were acquired. However, the case of Rexam Plc is a little different, as the companies confirmed that negotiations are taking place. In addition, indicative price and terms of the transaction were disclosed. There is also a sound strategic reason for the transaction as companies serve the same markets and have highly similar and almost commoditized products. The merger should therefore allow them to achieve substantial synergies and cost savings. Such transaction brings to memory last year's acquisition of Jos. A. Bank by Men's Wearhouse. That transaction also involved companies with highly similar businesses and was justified mostly by the possibility to achieve synergies and cost savings. Valuation As of February 10th, 2015, Rexam Plc's market capitalization was GBP 3,707 million and enterprise value equaled GBP 4,850 million. Company is currently valued at an EV/EBITDA multiple of x9.1 (based on annualized H1 2014 results). Indicative offer price of GBP 6.10 by Ball Corporation values Rexam Plc at an EV/EBITDA multiple of x10.2. However, assuming synergies of GBP 113 million (about 3% of Rexam's annual sales), the offer values the company at an EV/EBITDA valuation multiple of x8.5 only. We believe that this estimate is conservative, and much higher cost savings could be achieved. Taking into account the fact that Ball Corporation currently trades at a more expensive valuation and its share price significantly outperformed Rexam Plc's over the past 5 years, we think that Ball Corporation has an extra motivation to use its stock to pay for acquisition, and final offer price could be even higher. Conclusion In my recently published book Wall Street Back To Basics, I discuss the topic of an opportunistic approach to merger arbitrage investments. Some of the options available to investors include taking positions before the deal is announced and investing in the announced deals that have potential for price improvements. The approach is used by the most successful professional investors and hedge funds, among them John Paulson and his firm. Despite a cautious view investors should take when dealing with takeover rumors and media reports, we believe that for a relatively aggressive investor, the current situation in shares of Rexam Plc provides enough reasons to initiate a position and earn attractive return if the transaction will take place.

Event-Driven And Value Investment Digest