BemisBMS, which makes plastic packaging that grocers use to wrap steaks and cheeses, said Sunday night it will pay $1.2 billion in cash and stock for the packaging business of Rio Tinto RTP and become the world's dominant player in that market.
The acquisition boosts Bemis' share of the global food packaging market from 57% to 70% at a time when rivals are struggling under a worldwide recession.
The deal for the assets, known collectively as Alcan Packaging Food Americas, includes 23 facilities in the U.S., Canada, Mexico, Brazil, Argentina, and New Zealand. The business had sales of $1.5 billion last year and 4,600 employees.
The move is the latest by Anglo-Australian miner Rio to reduce its debt, which is about $23.9 billion after raising fresh capital last week through a share issue. Rio incurred significant debt in its 2007 purchase of Canadian aluminum giant Alcan for $38 billion.
"The sale of the Food Americas division is the first significant step in reducing the asset portfolio acquired with Alcan," said Guy Elliott, Rio Tinto's chief financial officer. "The transaction represents solid value given the challenging financial environment."
Bemis, which reported a total debt of $617.4 million at the end of the first quarter, said it will borrow $1 billion and issue $200 million in stock. The Neenah, Wisconsin, company recently had about 103.3 million shares outstanding.
Wall Street appeared generally positive about the deal. Baird analyst Ghansham Panjabi said in a client note Monday that the deal was attractive because Bemis only put up a modest amount of equity to bolster its heft in the still-fragmented flexible packaging industry.
Bemis said the deal will boost its net sales by 40% to some $5.3 billion annually. It will have more than 20,000 employees and 84 manufacturing facilities worldwide. The deal for the Chicago-based business division should also boost earnings, starting next year, it said.
The deal is expected to close late this year.
Bemis said it expects to retain its investment-grade bond rating and use its "strong free cash flow to support diligent debt repayment."
Layoffs are likely, as the company said it expects synergies of $65 million: "These improvements will be achieved primarily by optimizing product mix, improving operational and supply chain efficiencies, and reducing duplicate administrative costs."
So far in 2009, Rio Tinto has announced a total of $3.7 billion of asset sales, including its interest in an aluminum smelter in China, Brazilian iron ore operations and a coal mine in the United States.