Schmalbach buy puts Ball in driving seat

Ball's recently announced agreed offer for Schmalbach-Lubeca sets the seal on the consolidation of an important segment of the European packaging industry that will give the company crucial increased worldwide leverage.

The deal satisfies the long-frustrated wish of Ball, the number one US can maker, to break into the European market following its rejection by PLM - later bought by Rexam - in the mid-1990s. For the German beverage can maker, it provides an opportunity to focus on its long-term future. This had been less than certain since Eon began to withdraw from the company's capital.

The appeal of the European beverage can market to the Americans is the prospect of faster growth - the market expanded by 7 per cent to 38 billion units in 2001 - and higher returns and margins. This is the result of the pricing power and economies of scale resulting from the dominance of three large players: Rexam, Ball/Schmalbach and Crown Cork and Seal. Regulatory clearance is still required but the combined group will have a market share of "only" 31 per cent, well below Rexam's 44 per cent.

The deal comprises €900 million in cash plus the assumption of €250 million of pension liabilities and €16 million of net debt. This represents a multiple of 6.7 times 2002 earnings before interest, tax, depreciation and amortisation. This is slightly higher than the average of about six for recent deals in the metal packaging sector, but looks justified by the strategic position Ball gets in Europe. It should not impose undue strains on Ball's balance sheet, which will carry debt of $1.8 billion. This is three times ebitda compared with the 4.4 times reached following its acquisition in 1998 of Reynolds Metals' North American beverage cans business.

Assuming completion of the deal by early 2003, the focus of consolidation interest will shift to North America. Crown Cork is weighed down by hefty debt and asbestos exposure and is the weakest member of the top four club (which has Metal Container in fourth place). On Thursday, Rexam expressed an interest in Crown Cork's beverage can business. Reducing the American contingent to just three big players would do wonders for margins, creating an entirely different ball game for the industry.