Ball (BLL) reported strong second-quarter results Thursday that CEO John Hayes says has set up a foundation for a "multi-year, value-compounding growth period." One brick in that foundation is the recent acquisition of London-based Rexam.
But this source of growth could cost consumers.
"This is now a concentration of power," said TheStreet's Jim Cramer on CNBC's "Stop Trading" segment, "You saw a remarkable quarter coming when that consolidation occurred ... they are going to put the screws to everybody."
The $6.1 billion acquisition, which was completed June 30, created the world's largest beverage can manufacturer. But in order for the merger to happen in the first place, it needed to pass several regulatory approvals.
The U.S. Federal Trade Commission was the first to challenge the deal in April 2015, according to a Law360 report. The European Commission joined in a few months later citing concerns that the deal may reduce competition in the beverage can and aluminum bottle manufacturing industry and ultimately cause consumers to pay higher prices.
Eventually, Ball and Rexam struck a $3.42 billion deal with European packaging maker Ardagh Group, Reuters reported, as they were seeking antitrust clearance. The merger was then approved by regulatory agencies in Europe, Brazil and the U.S.
But Cramer said that the Justice Department should have prevented the merger, adding that it was a "travesty" because it's bad for the consumer and allowed the two biggest companies in the industry to come together.
Upon the approval, the Broomfield, Colorado-based Ball immediately began integrating the new business into its global metal beverage operations and is expecting to see the effects of the deal soon.
"Given the strength of our underlying businesses and the value potential of the Rexam acquisition, we see a path to doubling Ball's long-term goal of 10 to 15 percent comparable diluted earnings per share growth over each of the next three years," Hayes said in a statement.
The consolidation creates newfound pricing power for Ball. And if the company drives up the price for its products, it could mean that customers such as Coca-Cola (KO) , PepsiCo (PEP) and brewer MillerCoors would pay more. This could create a situation in which those companies would need to increase the prices of its products to offset the price of Ball products, meaning the consumer could ultimately end up paying the price. (PepsiCo is a holding in Jim Cramer's Action Alerts PLUS portfolio).
But Ball says it isn't focused on having price discussions with customers.
During the earnings conference call with analysts, George Staphos with Bank of America Merrill Lynch asked about the market dynamics following the Rexam deal, and whether there has been any perceptible change in the level of competitive activity post deal.
Hayes answered by saying that "this is a time of year where you're really not having discussions around price with our customers," adding that Ball has been focused on getting its people aligned over what our strategic objectives are.
While Ball is apparently not focused on its pricing, Jefferies analysts noted that it does expect to generate $750 million to $850 million of free cash flow in 2017, implying an "impressive" 8% free-cash-flow yield at the midpoint.
Furthermore, Hayes also said that when the company's leverage gets between three times and the three-and-a-half times debt-to-EBITDA range (a standard valuation metric that stands for earnings before interest, taxes, depreciation and amortization), Ball is poised to execute a "more robust share repurchase program."
Given management's expectation of doubling its annual earnings growth of 10% to 15% for the next three years, the world's largest beverage-can maker might need to start thinking about pricing soon.
