Business Context and Reporting Period
Company: Ball Corporation (Registrant) and Schmalbach-Lubeca Beverage Cans (Target).
Filing Date: November 20, 2002.
Event: Ball Corporation is soliciting consents from holders of its 7 3/4% Senior Notes due 2006 and 8 1/4% Senior Subordinated Notes due 2008 to amend indenture provisions. This action supports the pending acquisition of 100% of Schmalbach-Lubeca AG, the second-largest manufacturer of metal beverage containers in Europe. The acquisition agreement was entered into on August 29, 2002, and remains subject to various conditions.
Target Overview: Schmalbach operates 12 plants with an annual capacity of over 12 billion containers. Major customers include Coca-Cola, Britvic (Pepsi), Coors, Heineken, and Interbrew. The financial data presented excludes Schmalbach's PET and White Cap businesses, which were sold on July 1, 2002.
Key Financial Metrics
Schmalbach Historical Performance (Beverage Can Business Only):
- Sales (9 months ended Sept 30, 2002): €888.4 million (up 24% vs. prior year).
- Operating Margin (9 months ended Sept 30, 2002): 17.3% (up from 13.1% in prior year).
- Cash Flow from Operations (9 months ended Sept 30, 2002): €139 million (improved from a usage of €17 million in prior year).
- Capital Expenditures (9 months ended Sept 30, 2002): €6.2 million higher than prior year; expected to be €40–€50 million for the 12 months ended Sept 2003.
Pro Forma Combined Financial Data (Ball + Schmalbach):
| Metric | Year Ended Dec 31, 2001 | 9 Months Ended Sept 29, 2002 | 12 Months Ended Sept 29, 2002 |
|---|---|---|---|
| Net Sales | $4,540.8 million | $3,771.0 million | $4,826.9 million |
| Net Earnings (Loss) | $(63.1) million | $200.0 million | $209.8 million |
| EBITDA | $249.7 million | $527.0 million | $615.0 million |
| Adjusted EBITDA | $520.9 million | $522.8 million | $628.3 million |
| Interest Expense | $137.2 million | $99.4 million | $133.9 million |
| Capital Expenditures | $95.5 million | $104.8 million | $139.8 million |
Pro Forma Balance Sheet (as of Sept 29, 2002):
- Total Assets: $3,950.1 million.
- Total Debt: $1,978.3 million.
- Shareholders' Equity: $536.0 million.
- Working Capital: $84.9 million.
- Cash and Cash Equivalents: $58.2 million.
Pro Forma Ratios:
- Net Debt / Adjusted EBITDA: 3.1x.
- Total Debt / Adjusted EBITDA: 3.1x.
- Adjusted EBITDA / Interest Expense: 4.7x.
Material Changes vs. Prior Period
Schmalbach Sales Growth: The 24% increase in sales for the first nine months of 2002 was driven by two new plants acquired from Rexam in October 2001 (Southern France and UK), which added approximately 1.9 billion cans annually. Additional growth came from a second production line in Poland and a 4% overall market expansion in Europe.
Margin Expansion: Operating margins improved from 13.1% to 17.3% due to higher capacity utilization, lower raw material costs (specifically aluminum), and successful down-gauging programs.
Pro Forma Impact: The acquisition significantly alters Ball's financial profile. For the 12 months ended Sept 29, 2002, pro forma net earnings are projected at $209.8 million compared to a historical loss of $(63.1) million for the year ended Dec 31, 2001. This improvement is largely due to the inclusion of Schmalbach's profitable operations and the reversal of certain non-recurring consolidation costs in the adjusted metrics.
Guidance, Outlook, Risks, and Unusual Items
Financing Strategy: Ball expects to finance the acquisition through new credit facilities and the offering of new senior notes. The total purchase price is estimated at $940.4 million, consisting of $885.6 million in cash, $18.8 million of retained Schmalbach debt, and $36 million in acquisition costs.
Consent Solicitation: The company is soliciting consents to amend indentures to allow the acquisition. The consummation of the deal is not conditioned on the success of this solicitation.
Unusual Items and Adjustments:
- Non-recurring Costs: Pro forma data excludes $271.2 million in business consolidation costs for 2001 and $17.5 million for the 12 months ended Sept 2002.
- Debt Write-off: An anticipated write-off of $5.6 million related to refinanced debt is not included in pro forma earnings.
- Accounting Differences: Schmalbach financials were prepared under International Accounting Standards (IAS) and reconciled to US GAAP. Key adjustments included the reversal of goodwill amortization (SFAS 142), capitalization of financing costs, and reinstatement of impairment losses not permitted under US GAAP.
Risks: The acquisition is subject to various conditions. The pro forma data is based on preliminary estimates of fair value, which may vary upon consummation. Interest rate sensitivity is noted; a 1/8% change in rates could impact interest expense by approximately $1.1 million to $1.6 million depending on the period.
Investor Verification Checklist
- Verify the final purchase price allocation and fair value adjustments upon deal closing, as current figures are preliminary.
- Confirm the success of the consent solicitation for the 7 3/4% Senior Notes due 2006 and 8 1/4% Senior Subordinated Notes due 2008.
- Monitor the execution of new credit facilities and the issuance of new senior notes to ensure financing is secured.
- Review the integration plan for Schmalbach's 12 plants to assess the realization of projected synergies and capacity utilization improvements.
- Track aluminum commodity prices, as Schmalbach's margins are sensitive to raw material costs.
- Validate the pro forma debt ratios (Net Debt/Adjusted EBITDA of 3.1x) against the company's credit covenants post-acquisition.