O-I buys Mexican bottler for $2.15B

Owens-Illinois Inc. is poised to go from having a single customer in Mexico to commanding nearly half the country's market for glass packing for food and beverages with the close of a multibillion-dollar deal announced on Wednesday.

In its first major acquisition in more than a decade, Perrysburg’ O-I will spend $2.15 billion to buy Vitro SAB’s profitable glass container business. The deal includes five glass factories in Mexico, one in Bolivia, and a number of contracts with major Mexican food and beverage makers. The company employs about 4,700 people in the unit being sold to O-I.

Owens-Illinois officials say the acquisition will have an immediate impact.

“It fills a gap in our footprint in the Americas and will enable us to better support our large multinational customers as they expand throughout the world,” Andres Lopez, O-I’s chief operating officer, said in a Wednesday conference call. “Perhaps more importantly, it provides a strong position in Mexico to supply the local markets and customers there.”

The news sent shares of O-I soaring. Shares closed the day up 9 percent at $25.98.

Vitro is Mexico’s top supplier of glass containers. Mr. Lopez said the company controls nearly 40 percent of Mexico’s glass packaging market.

Owens-Illinois, meanwhile, historically has had almost no presence in Mexico.

It was only last fall that O-I entered into a $350 million joint-venture agreement with Constellation Brands Inc. to produce bottles at a factory in the small town of Nava, Mexico, for the beverage company’s nearby brewery.

An O-I spokesman said Constellation, which brews Corona, Modelo, and a number of other beers, remains the company’s only customer in Mexico. Incidentally, Vitro signed a seven-year contract with Constellation last year.

Chip Dillon, a partner at Vertical Research Partners who follows the packaging industry, said the relationship with Constellation looks to be one of the deal’s more important parts. Constellation is aggressively targeting the U.S. market, and analysts also say Mexico’s beer market has been growing.

That growth is something Owens-Illinois could use. The company has been through a challenging stretch of late, led by struggles in China, a changing Australian wine market, and a strong U.S. dollar that lowers revenues made outside the United States. Revenues have fallen and O-I’s share price has slumped.

But Mr. Dillon’s firm believes the worst is behind O-I and that this acquisition should help going forward.

“We’re generally favorable toward it,” Mr. Dillon said in a phone interview. “It’s not without risk, but you sometimes can’t control when these opportunities come up.”

Owens-Illinois is taking on $2.25 billion in debt to finance the all-cash deal. The company said the extra debt load will add about $85 million a year in interest payments.

But O-I is expecting a significant return on that investment. Mr. Lopez said the company expects the addition of Vitro to add $945 million in annual revenue to the $6.8 billion O-I reported last year. Officials also expect Vitro’s contribution to boost earnings immediately, raising profits by 50 cents per share within three years.

Though there’s been some hand-wringing about the future of glass bottles in the United States as more craft brewers have looked toward cans instead of bottles, glass is still a major player in Mexico. 

Industry data shows glass packaging has maintained a stable 25 percent market share over the past 10 years in Mexico.

“Given key demographic trends, we expect that share to remain stable going forward,” Mr. Lopez said.

Vitro’s two largest segments are food producers and the spirit and wine industry. The company also supplies bottles for soft drinks and beer. O-I officials say every one of those business segments has been growing for Vitro.

“We have long admired Vitro, not only because of their strong performance and distinguished history, but because of our shared commitment to long-term customer relationships, quality, and sustainability,” said Al Stroucken, O-I’s chief executive officer.

 O-I officials said they expect to keep Vitro’s management team when the deal is closed. The acquisitions must get regulatory approval and be approved by Vitro shareholders. It’s expected to take nearly 12 months for the deal to be finalized.