Silgan Vaults to Top of Can Industry : Containers: With Byzantine schemes, the company swallowed up rivals and now manufactures a third of the cans on U.S. grocery shelves.

On the surface, there seems scant possibility for subtlety in metal food cans.

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“You buy steel. You bend it. You weld it,” is how PaineWebber analyst George Staphos sums up this $4-billion-per-year industry. Three flat pieces of metal, a big machine and you’re there. And the market is about as exciting as tomato paste--it chugs along year after year on a drearily predictable stream of creamed corn and cat food.

Then came Silgan Containers Corp. The company burnished metal cans with the glitz of junk bonds and turned a dull, smokestack industry on its head.

What the business lacked in subtlety, Silgan made up for with Byzantine debt schemes and a head-spinning corporate structure.

In one highly leveraged deal after another, it swallowed rivals with notorious stealth. Now Silgan has emerged as the industry leader, manufacturing at least a third of the cans on the nation’s grocery store shelves. Revenues this year, including plastics, are expected to approach $1.5 billion.

Silgan “was an enigma. Now they are not only a force, they are the force in the food can business,” said Tim Burns, packaging industry analyst with CS First Boston in Cleveland.

Silgan’s swift ascent is all the more striking considering that eight years ago the company was nothing more than a small office and two disenchanted executives bent on building a can-making empire. The founders, Phil Silver and Greg Horrigan, continue as directors.

Junk bonds were the key to their success, said James Beam, Silgan’s CEO. Silgan is a subsidiary of closely held Silgan Holdings Inc., which was founded in 1987 with the $151-million buyout of the can-making operations of Nestle S.A.’s Carnation unit. Most of the money was raised through the sale of high-yield bonds at interest rates of upward of 15% by Morgan Stanley & Co., which still owns a 38.5% stake.

It was just the kind of highly leveraged acquisition that got many companies into trouble in the era of corporate raiders.

But Silgan was a case of how to do junk bonds right, contends Beam, 52. “Through all the smoke and mirrors of the ‘80s, some good things happened,” he said. “All those funny financing ventures allowed some companies to recreate themselves.”

After Carnation, Silgan bought the Fort Madison Can Co., Seaboard Carton Co., Northern Can Systems. Then came the biggies: In December, 1993, Silgan acquired the assets and working capital of container manufacturing operations of Del Monte Corp. for $72.8 million.

And in June, Silgan agreed to purchase the Chicago-based food can operations of American National Can, a unit of French state-owned Pechiney P.A., for an undisclosed price.

ANC was a giant competitor with 1994 sales of $587 million. Silgan, whose 1994 revenues were $861 million, will expand into a nationwide force with the ANC purchase. It now has 37 plants--including nine in California--and about 4,300 employees nationwide.

What’s more, ANC had been recently restructured, so Silgan won’t have to fuss much with cleaning it up, said Burns, the analyst. “With American National Can, Silgan has bought itself another two to three years of very significant operating profit growth,” he said.

Through all these acquisitions, Silgan kept issuing notes, refinancing its initial high-yield bonds a couple of times, and keeping earnings fairly flat. “We’ve done it all with other people’s money,” Beam said. Holders of those high-risk bonds have been left “either happy or ecstatic,” he added.

Although Silgan still carries a heavy load of expensive debt, it has been able to retire many bonds with cheaper borrowings. The ANC acquisition was completed largely through conventional bank financing, Beam said.

The strategy worked, said Beam, because Silver and Horrigan were able to secure a reliable cash flow--one large enough both to keep up with the capital investments and to cover the company’s whopping interest payments.

The latter was no small feat. Silgan Holding’s long-term debt before the American National Can acquisition was more than half a billion dollars, according to documents filed with the Securities and Exchange Commission. Documents show Silgan Holding’s interest payments and financing costs last year alone were $66 million.

Sales growth, and steady improvements in operating profits, were needed to help Silgan cover its costs. The company did this by persuading food-processing firms to sell off their in-house can-making operations. Then they increased efficiency in the plants they bought.

And the very dullness of the industry worked in their favor. Cans are not exotic. But they’re eternal: It’s a pretty good bet that people will buy about the same amount of condensed milk this year as last. “This business provides stable performance over the long run,” said Jim Potesky, a director in the corporate ratings group of Standard & Poor’s.

S&P; has a default risk rating of B plus on Silgan Corp. (another Silgan holding company), and B- on Silgan Holdings Inc. “They are able to cover their interest expense,” Potesky explained. “It’s thin . . . but they are doing it. This is a nice, solid single B company.”

Other companies quickly followed Silgan’s lead. “Silgan was a driving force behind the consolidation of the whole industry,” said Daniel D. Khoshaba, a vice president at Salomon Brothers Inc. in New York.

In less than a decade, through a cascade of acquisitions, the field of eight major can competitors has shrunk to three: Silgan, Philadelphia-based Crown Cork & Seal Co., and Muncie, Ind.-based Ball Corp.

But the consolidation, which analysts say has assured the industry’s long-term health, has been tough on workers, especially union ones. “Fifteen years ago, we had 40,000 members in the can industry,” said Leon Lynch, international vice president of the United Steel Workers of America. “Now it’s a stretch when we say 3,000.”

It’s a familiar story in American manufacturing: The unions blame automation, plus plant closures for job losses. Silgan has done its share: It recently closed a plant in Oakland and another in Kentucky. Conflicts over new contracts at Silgan plants led to a machinists’ strike at a Silgan plant in Modesto this summer.

Beam said many gains in efficiency came by cutting management, not hourly workers, and analysts agree. The American National Can acquisition will probably result in fewer than 100 layoffs, many of them salaried, he said.

Most ANC union contracts are being honored, said both Beam and union officials. Of Silgan’s 3,500 hourly workers, about 3,000 remain unionized, Beam said, adding that Silgan’s approach was to negotiate more favorable contracts, not break unions.

Despite its rapid growth, Silgan is not yet at a place where it can rest on its laurels. It’s still saddled with massive interest payments and it must continue its growth to keep up.

But Beam allows himself quiet satisfaction at having “sneaked up on everyone.”

“It’s not glamorous, it’s not high-tech . . . but it gets in your blood,” he added.