Owens-Illinois Buys Brazilian Co. - Analyst Blog

Owens-Illinois Inc. (OI) increased it ambit in Brazil, South America’s largest economy and container market, with the acquisition of Brazilian glassmaker Companhia Industrial de Vidros. The deal is valued at $603 million, which includes future tax benefits with an estimated present value of $140 million. These tax benefits include federal and state incentives for development of Brazil’s northeastern region.

 

Companhia is a leading glass container producer in northeastern Brazil. The acquisition includes two plants in the state of Pernambuco and one in the state of Ceará. Together, the plants employ approximately 1,300 people and produce glass containers for beverage, food and pharmaceutical industries, as well as for tableware.

 

The acquisition will boost Owens-Illinois’ capacity in Brazil by approximately 50%. The return on investment is expected to exceed Owens-Illinois’ cost of capital. The purchase price reflects a 5.8 times EBITDA (earnings before interest, taxes, depreciation and amortization) multiple for the first year of operation, excluding the present value of future tax benefits but including estimated net cost savings.

 

The deal was funded by cash-on-hand and the global revolving credit facility. As of June 30, 2010, Owens-Illinois had cash and cash equivalents of $682.3 million compared with $188.2 million as of March 28, 2010.

 

In the first full year of operation, Owens-Illinois expects the acquisition to boost regional net sales by approximately $200 million. The company generated revenues of $1.1 billion in 2009 in the South American region, which contributed 15.6% to its total revenues. In the recently reported second quarter, the region posted revenues of $247.6, or 14% of total revenues.

 

Economic development and increased consumer purchasing power is driving significant growth in the Brazilian container market. Brazil contributes more than 50% of South America’s total GDP and GDP growth. Further, Brazil’s glass container industry is projected to grow more than 4% per year. Hence, Brazil is a viable market for expansion.

 

The acquisition is in line with Owens-Illinois long-term strategy of expansion in fast-growing, emerging markets. Owens-Illinois is particularly focused on Asia Pacific and Latin America given the fact that these markets collectively represent more than 50% of global glass consumption.

 

The acquisition will also enhance Owens-Illinois’ capability to serve its customer needs as 75% of customer investment in new glass filling lines will be built in the southeast and northeast regions during the next several years. This will also lead to significant net cost savings in the form of reduced input costs and logistics costs.

 

However, the company’s substantial debt could result in a major outflow from operations. Further, the company has asbestos liabilities and may record additional charges in the future, for estimated asbestos-related costs.

 

Overall, we believe Owens-Illinois’ low near-term revenue visibility, competitive environment and continued weakness in some end-markets will continue to undermine the company’s growth prospects and profitability. We currently have a Zacks #4 Rank (Sell) and maintain our Neutral rating on Owens-Illinois.

 

Perrysburg, Ohio-based Owens-Illinois is the world's largest glass container manufacturer for food and beverage products, including beer, wine, spirits and non-alcoholic drinks. The company commands market leadership in each of its four operating regions ─ Asia Pacific, Europe, Latin America and North America.