Crown Cork & Seal/ CarnaudMetalbox Merger:A U.S. packaging firm acquires a French packaging firm with the objective of creating the largest global packaging firm in the world.

1. Crown Cork &
Seal/ CarnaudMetalbox
Presented By-
LN
Rohit Shankar
Satish Sahoo

2. US Packaging Industry
US PACKAGING INDUSTRY GROWTH
 US packaging Industry is maturing and growing at a moderate rate of 2% and 3% annually and
generating overall sales of $66 billion.
MARKET SEGMENTATION
 39% of the US packaging industry market space is dominated by metal cans, glass containers,
plastic bottles and closure companies, like CCS.
 Another 39% of the market was dominated by giant integrated paper and forest product
companies.
 22% of the packaging industry was dominated by Flexible packaging (where CCS is not a player)
INDUSTRY CONSOLIDATION & TRENDS
 Industry is competitive with various players in the market which is driven by Inorganic growth and
growing by domestic and international consolidation.
 Cited reasons for consolidations were
1) overcapacity in packaging materials
2) Customers reducing their number of suppliers to achieve efficiency.
3) Emergence of new packaging material causing product substitution as mature products became
obsolete.
• New product like PET’s trend was increasing from 34% to 40% at the expense of glass but with
aluminum price hikes this trend is taking serious inroads.

3. Europe and Emerging Markets
EUROPE
 Less mature packaging market growing at an annual growth rate of 5% to 6% .
 Consolidation has reduced number of players hence overall market is dominated by only few
market players ( CMB, PLM, Pechiney etc).
 Consolidation is also adding diversity of the product lines to attract the new customers in the
market.
EMERGING MARKETS
 Packaging companies are working under government protection and state ownership.
 Integration of economies in West Europe and privatizations in East Europe and South America
were driving Europe and US companied towards Emerging markets.
 Per capita Consumption has increased in Hungary, Czech Republic, Poland and Slovakia hence
multinationals like Pepsi and Coke are planning to expand their operations.
 With smaller demand growth showed by Singapore , Thailand and Vietnam was strongly supported
by huge consumption increases (10%-12%) in China and China hence attracting packaging firms
towards Asia.
 CMB is well positioned in this area and expected to become dominant player in Asian market.

4. Crown Cork and Seal
INCEPTION
 Crown Cork and Seal company was formulated in Aug 1891 and prospered during 1930’s by selling
bottle caps to almost half of the US.
OLD CORPORATE STRATEGY
 Crown Cork believed in spending less on research and development and discarded inefficient
divisional accounting practices by giving P/L responsibilities to plant managers.
 In order to have a stable consumption market CCS strategy was to focus on international growth
specially in developing markets and they achieved it by acquiring pioneer rights from various
governments.
 Crown’s 62 foreign plants generated 44% of sales and 54% of operating profit
 Crown’s overseas investment strategy helped CCS to recycle substandard equipments to many
other regions of the world.
 Crown believed in keeping company less leveraged ,which is reflected in their efforts as they
reduced D/V ratio in 1956 from 42% to 4% in 1988.
 During Connelly CCS believed in keeping balance sheet clean and pursue acquisition with great
caution .

5. Avery’s Reign in CCS
NEW CORPORATE STRATEGY
 With declining metal container growth, Avery assessed the opportunity in plastics and
emerging markets and became interested in changing the long existing CCS strategy of
over cautious acquisitions.
 Avery acquired Continental corporation for $800 mn which added $2 billion in new
sales and doubled the size of CCS.
 Continental acquisition also gave the momentum to CCS’s much awaited R&D section.
 Constar’s acquisition gave CCS a strong foothold in PET plastic containers for food ,
beverage, household chemical etc.
 Acquisition of Tri-Valley Grover’s brought Crown a leading,21%, market share in food
can manufacturing .

6. Why CCS wants the Merger ?
Problems in US-
 US packaging Industry is considered to be mature and is growing at a moderate rate of
2% and 3% annually. So growth prospect in US is bleak .
 Tight margin and over capacity problem in US lead to a consolidation in the industry . To
overcome the problem of over capacity CCS was looking for new market to stimulate
demand .
Europe and emerging market looked better -
 But Europe was growing at a faster pace at around 5 to 6 % .
 Growth prospect in emerging market was still better .
 CMB was well poised to grow in emerging market and was already the leading player in
Europe .
If the merger goes through the combined entity would be the biggest player in the
industry and would be able to benefit from economy of scope and scale .
Crown’s Solid and successful M&A Background :- CCS has been successfully
completed many strategic acquisitions in the past-which leads to the higher probability of
this merger’s success.

7. What is in it for CMB?
 If the merger goes through the combined entity would be the biggest player in the
industry and would be able to benefit from economy of scope and scale . Also as the
 CMB had a higher SG&A as a percentage of sales as compared to CCS . So combined
entity have fair chances of benefitting from the merger by reducing operational expenses .

8. Opportunities in Merger
STRATEGIC OPPORTUNITIES
 Minimal Cannibalization:- There was very minimal overlap in the business
regions where both of them are competing, hence less chances of cannibalization. Ex-
Vietnam
 Complementing each other’s Business:- Most of the regions where both of them
are present are actually complementing markets with their products, for Ex- China
Crown is in beverage cans and CMB is in food and aerosol cans, in Saudi Crown have
cans and CMB has ends etc.
 Location Advantage:- Crown has strong presence in US whereas in CMB has
greater exposure in European region.
ECONOMICAL OPPORTUNITIES
 Higher Bargaining Power:- Combined entity will become the largest steel buyer
hence will have higher bargaining power from their raw material supplier.
 Less Purchasing Benefits:- Due to less overlap of similar products the overall
significant savings produced by merger would be less(approx 1%-2%)
 Common Suppliers in the same region:- Due to CMB’s low procurement
volumes from Alcan -will preclude combined entity’s overall cost savings.

9. Challenges in Merger
 Political Issue:- France’ labor protectionism policies and strong legal system might inhibit
CCS ,after merger, from laying them off as a measure of cost cutting- thus reduces
restructuring flexibility
 Change in Capital Structure:- Merger might lead CCS’s capital structure(D/V) to very high
levels (up to 61%).
 Goodwill Accounting Issues:- Amount cannot be deducted for Tax Benefit purposes .
 Overcapacity in Europe:- Albeit at slower rate but Europe was also gripping with future
overcapacity concerns in Packaging industry.- This would demand CCS to justify the value and
need of the merger.
 Cultural Heterogeneity:- On contrary to US region, diversified customer base in European
region demands different packaging preferences and standards which will lead to higher
operating cost.
 High Operating costs in Europe:- Doing business was costly which could trim down the
desired expected returns.
 Concentration Issues:- Smaller markets such as tinplate aerosol cans in Europe can create
problems which can create lengthy delays in completion of transaction
 Dividend Issue:- Against the CCS’s usual practice French Law favor companies to distribute
wealth to shareholders in the form of dividends.

10. What should be the price of the Deal(Synergy)?
Valuation Methodologies used for Cross Border Acquisitions
Approach 1
 1. Forecast foreign currency cash flows using host country tax rate
 2. Estimate foreign currency discount rate using project (target firm)—
specific capital structure and beta.
 3. Calculate PV of the free cash flows in foreign currency.
 4. Convert to home currency using spot exchange rate.
Approach 2
 1. Forecast foreign currency cash flows using host country tax rate
 2. Forecast future exchange rates using parity relationships and
convert cash flows to home currency.
 3. Estimate home currency discount rate using project-specific capital
structure and beta.
 4. Calculate PV in home currency.

11. Intrinsic Value – Cost of Capital CMB
Cost of Capital CMB
France Market Risk premium 6.40%
Risk Free rate 5.4% Unlevered Beta 0.8
Interest Coverage 3.5
Rating A- Levered Beta 1.02
Spread 1.5%
Rf 5.35%
Kd 6.9%
Tax rate 33.2%
Kd(1-Tax rate) 4.6% Tax rate 33.30%
Ke 11.9%
D/V 27.0% D/E 0.428571
E/V 73.0%
WACC 8.7% Ke 11.9%

12. Intrinsic Value- CMB
Sales growth rate 5%
Terminal Growth rate 3%
Cost of Capital 8.70%
PV of Future CMB cash flows in Francs 20107.06
Cash in Francs 2293.00
Enterprise value in Francs 22400.06
Book Value of Debt in Francs 5884.00
Market Value of Equity in Francs 16516.06
No of Shares Outstanding 82.3
Intrinsic Share price in Francs 200.68
Market Share price in Francs 186.58
Spot Exchange rate FF/$ 4.891
Intrinsic Share price in USD 41.03

13. Intrinsic Value – by allocating whole synergy to
CMB
Sales growth rate 5%
Terminal Growth rate 3%
Cost of Capital 9.15%
PV of Future CMB cash flows in Francs 25050.90
Cash in Francs 2293.00
Enterprise value in Francs 27343.90
Book Value of Debt in Francs 5884.00
Value of Equity in Francs 21459.90
No of Shares Outstanding 82.30
Share price in Francs by allocating complete synergy
to CMB in Francs 260.75

14. Verdict on Price
 The deal offered is at 225 francs per share which is over
the intrinsic value(200.6 francs ) and market value
(186.58 francs) but is below the 260 francs per
share(maximum) that CCS can afford to pay.
 Thus in the current scenario the synergy is being
allocated to both the shareholders of CMB as well as CCS
which may help in getting the approval of shareholders
on both sides for the proposed merger.
 The allocation of synergy in this case results in addition
of 6.73$ of intrinsic value per share for existing CCS
shareholders and CMB shareholders get a premium of
12.5% over intrinsic value, 20% over the market price.

15. Structuring the deal
Assuming a 50% cash, 50% stock deal with CGIP getting only equity considerati
Market price of CCS share in USD 42.75
Spot FF/$ 4.891
Offerred price in francs for CMB 225
Offered price in USD for CMB 46.00
Exchange ratio 1.08
No of shares outstanding of CMB 82.3
No of shares outstanding for CCS 89.36
No of shares of CGIP 26.92
Newco outstanding shares 133.64
%tage ownership of CGIP in CCS after merger 20.15%
Cash required for transaction in Francs 9258.75
Cash required for transaction in USD 1893.02
Earnings per share will be diluted from 1.47 to 1.42

16. How should the Deal be structured ?
 The rating must be maintained at BBB and as we are at threshold of
interest coverage ratio for a synthetic rating downgrade at 50% cash ,
hence we cannot borrow a lot more.
 Similarly we cannot also afford to give a lot of shares in exchange
because it results in excessive dilution for the existing shareholders.
 The 50% cash 50% stock deal hence looks viable in this case.
Cash required for 50-50% cash stock deal(USD) 1893
Extra cash requirement by increasing cash component
without a Credit downgrade USD 485.32
Total Cash Component (USD) 2378.32
Total Cash Component (Francs) 11632.34
No of outstanding shares of CMB 82.3
Offered purchase price (Francs) 225
Total price paid 18517.5
%tage of cash offer(max) 62.82%

17. How should the Deal be structured ?
Sales 9980
EBITDA 921 Sales 9980.00
Amortization of EBITDA 921.00
goodwill 153 Amortization of
Interest expense 340.00 goodwill 153.00
EBIT 428 Interest expense 368.27
Income taxes 204 EBIT 399.73
EAT 225 Income taxes 204.00
Minority EAT 195.73
interests -32
Minority interests -32.00
NI 193
Interest NI 163.73
coverage 2.70 Interest coverage 2.50

18. How to convince your own Shareholder of the
Strategic advantage of the Deal?
 Dilution of ownership
 EPS Dilution
 At the current exchange ratio we are still getting the benefit of synergy .
 It is a strategic move given the limited growth potential of the US packaging industry .

19. How to convince shareholders of CMB(especially
CGIP) ?
 Pay them a premium over the market value and intrinsic value .
 As CGIP would be the single largest share holder of the combined firm it can benefit from
the upside of the combined firm .


20. How to Deal with the Antitrust Problem?
ANTITRUST EFFECT :
 In a horizontal merger like this , the acquisition of a competitor (CMB) could increase
market concentration and increase the likelihood of collusion. The elimination of head-
to-head competition between two leading firms may result in unilateral anticompetitive
effects(price hikes , quality degradation etc)
PROBLEM
 Concentration issues can arise in smaller markets for Tinplate aerosol cans which can
produce lengthy delays in transactions.
SOLUTION
 Aerosol not being a key product area ,CCS can afford to divest it to save itself from any
antitrust litigations.

21. How to Deal with the Goodwill Problem?
 NewCo will not be able to use the Goodwill generated from the merger for any tax
deduction purposes.
 Goodwill can only be impaired under GAAP standards
 In future if synergy is not realized then the goodwill might be impaired, which would
destroy value for the organization.

22. Exchange and Interest rate Risk.
 Francs are appreciating with respect to USD from the data in Exhibit 14, also
the inflation in France has been lower compared to that of the US , so assuming
the trend continues the French operations would be worth more to CCS than
currently.
 If they try and load debt for the merger, it would result in a possible downgrade
of their Credit rating increasing their cost of borrowing.

23. What should be the Dividend Policy of the New
Company?
 Given the minimum growth potential and mature nature of the industry, packaging
industry in US should payout the benefits to shareholders in the forms of Dividends .
 Also as the new investment opportunities remain less thus it again becomes an incentive
for CCS to payout dividends.
 By convention in Europe CMB has been paying out dividends so maintain that flow and
to keep the largest shareholder, CGIP, of new company happy NewCo should start giving
dividends.

24. Recommendations
 Price range should be less than 260 Francs per share
 The deal structure should be at max 62% cash
 The consequences of concentration risks in the Tinplate aerosol cans division must be
properly tackled.
 CCS might have to succumb to demand of dividends from the CMB shareholders.

25. Thank you