Coulson's Ardagh expanding at a dizzying pace
PAUL Coulson has done a remarkable job at glass and metal packaging group Ardagh. He has taken the business from a relatively sleepy small Irish glass making monopoly to a major international group with revenues of €3.7bn and 18,000 employees located at 100 facilities worldwide.
A series of enormous acquisitions have enabled the company to grow exponentially to a point where it looks set to become the largest glass bottle manufacturer in the US, if competition approval for its latest acquisition gets the go-ahead.
It already makes bottles, drink cans, food tins, and a range of other products for the likes of Coca-Cola, Jim Beam, Heineken, AB InBev, John West and Proctor & Gamble.
What is most extraordinary is the speed at which this has been done. Coulson financed 10 acquisitions with around €3.5bn of borrowing before buying Verallia, the US glass business of St Gobain, for $1.7bn (€1.29bn) in January of this year.
This deal saw Ardagh group borrow another $1.6bn in the bond market. Coulson bought two other US glass makers in 2012 – Leone Industries in March and Anchor in August for $880m.
Ardagh indicated its intention to do an IPO as far back as the middle of 2011. In April 2012 it said it planned to float in the third quarter of 2012. In November of 2012 it said it still wanted to proceed, but once it did the Verallia deal in January of this year, the flotation was put on hold.
Last week Ardagh said it had shelved its plans for a $500m pre-float fundraising. The competition probe into the Verallia deal, in which Ardagh refutes many of the competition claims of the American regulator, makes it too uncertain for an IPO at this time.
So, where does Ardagh stand now? Well the company has been growing at such speed that it can be difficult to get a handle on the performance of its various divisions year-on-year.
But recent accounts filed in Luxembourg for Ardagh Group SA show that in the year to December 2012 it made a pre-tax loss of €291m. This was up from €37.7m the previous year.
This massive loss looked a lot worse than it was due to a raft of exceptional items. These amounted to €243m, and included everything from pension accounting adjustments to a massive €117m impairment charge on its metal packaging division.
The company said it reflected the difficult trading conditions in some of its European metal packaging markets. Coulson's foray into metal reached a high point with the €1.7bn purchase of Impress Group in 2010. Ardagh is watching costs, and squeezing savings, but it remains a tough business.
But even when all of the exceptional items are taken out, Ardagh still lost €47m in 2012, compared to a profit of €25m in 2011. This is not the right direction for an IPO.
In total, group revenues grew to €3.7bn, up from €3.2bn. Its earnings before interest (EBITDA) rose by just €38m in 2012. How much of that was simply due to acquisitions and how much was due to growth in the businesses it already owned? Well Ardagh compiles figures on a pro-forma basis showing what the performance would have been if it had owned all of its 2012 acquisitions since the beginning of 2011.
On a pro-forma basis EBITDA would have been down to €679m from €687m a year earlier. Within that, glass is performing very well with higher revenues and higher earnings, but metal revenues and earnings would have actually fallen.
It seems that increased raw material prices and a tough environment are hitting the profit margins and growth levels in the metal packaging business. That is a problem, because metal packaging in 2012 was a bigger part of the business than glass.
That looks set to change when and if the Verallia deal goes through. Glass will be on top again.
But it has been incredibly costly to get to this point, so quickly. According to the latest Luxembourg accounts for the group, its total liabilities exceeded its total assets by €884m. Group assets of €5.1bn included goodwill of €724m and other intangible assets of €378m.
Its net borrowings amounted to €4bn, up from €2.95bn a year earlier. The cost of financing this debt is pretty steep with the debt interest bill rising from €258m in 2011 to €358.7m last year.
So it has been a remarkable business journey for Coulson, who has an amazing ability to raise debt, even in tough times, and a management team that is absorbing and integrating enormous businesses in a very short period of time.
But if glass and metal packaging are such good businesses, why are so many owners so willing to sell them? There are lots of cases of operators like Coulson in various industries who specialise in what they do. They can extract value out of companies that, without the right focus, others cannot do.
Equally, Coulson could be just paying an irresistible price for the assets, confident in the knowledge that he can get synergies and scale to grow them.
The bond market has backed him all the way. The challenge will be to get the timing right so the equity market does the same thing.