Wednesday 16 October 2019

Coulson shows plenty of bottle as investors buy into Ardagh IPO package

As the global giant is valued at €5bn after making its debut on the New York Stock Exchange, its chairman says he is relaxed about the €8bn debt pile following a string of acquisitions, writes Dan White

Ardagh chairman Paul Coulson rings the opening bell on the New York Stock Exchange as the packaging giant’s shares are listed. Photo: AP Photo/Richard Drew
Ardagh chairman Paul Coulson rings the opening bell on the New York Stock Exchange as the packaging giant’s shares are listed. Photo: AP Photo/Richard Drew

Dan White

On Wednesday, Ardagh shares finally debuted on the New York Stock Exchange, with the packaging company being well-received by investors. The shares, which had been initially priced at $19, jumped to over $22, valuing the whole company at $5.4bn (€5.04bn) and chairman Paul Coulson's stake of close to one-third of the company at $1.8bn (€1.68bn).

Formed out of the old Irish Glass Bottle Company, Ardagh has grown through a series of audacious acquisitions under Coulson's leadership.

Ardagh's first major takeover was of UK glass manufacturer Rockware in 1999. This was followed by the purchase of Rexam's glass division for €660m in 2007. In 2011 Ardagh paid €1.7bn for metal packaging group Impress. This was followed a year later by the $880m (€821m) takeover of Anchor Glass and in 2013 Ardagh paid $1.7bn (€1.7bn) for the US glass packaging arm of Verallia.

The biggest deal of all came in April 2016 when Ardagh agreed to pay $3.4bn (€3.1bn) for metal-packaging assets being sold by Ball Corporation and Rexam following their 2015 merger.

This €7bn acquisition spree has created a global packaging giant. Ardagh had total sales of €7.6bn and earnings before interest, taxes, depreciation and amortization (ebitda) of €1.18bn in 2016.

That's the good news. The not so good news is that is that, following the spate of debt-financed acquisitions, Ardagh's gross borrowings stood at a massive €8.1bn at the end of 2016, up from "only" €6.4bn at the end of 2015. Even when the €745m of free cash sitting in Ardagh's balance sheet is taken into account, its net borrowings still stand at €7.4bn, or more than six times ebitda.

Coulson doesn't seem to be concerned. Based on last year's €1.18bn of ebitda, he can pay back about €475m a year.

"We have a steady cash flow which allows us to deleverage and grow," he says.

"We would be very comfortable if it [debt as a multiple of ebitda] came down to four. That does take time. We are very relaxed about it. Look at the rates we can borrow money at."

Indeed. Ardagh's net interest cost of €338m in 2016 works out at an average interest rate of just over 5pc. Since the end of the year, Ardagh has been able to refinance much of its debt with new, cheaper borrowings.

Ardagh is now a major player in packaging, with the global glass and metal packaging markets having an estimated annual value of $60bn (€56bn) each. It is the second-largest supplier of glass packaging in North America and the third-largest in Europe. Ardagh is also the second-largest supplier of cans in Europe as well as being the second-largest supplier of food and beverage cans in Europe and the third-largest for drinks cans in Europe and North America.

Glass packaging is much more profitable for Ardagh than metal packaging. While glass accounted for only 40pc of its 2016 sales, it generated 49pc of the ebitda.

This is reflected in the contrasting ebitda margins of the two divisions, 21.3pc and 21.5pc respectively at its European and North American glass packaging operations as against just 16.1pc and 12.5pc respectively at its European and North American metal-packaging businesses.

Glass and metal packaging, ie bottles and cans, have a lot to recommend them in an environmentally-conscious era. While the initial production of the primary raw materials, glass, aluminium and steel is energy-intensive, they are pretty much endlessly recyclable after that. Unfortunately, changing consumer preferences mean we are eating less canned and bottled processed foods and more fresh food instead. In any supermarket you can see cans and bottles increasingly pushed to the marginal space along the outside walls

Ardagh also has a very large exposure to two categories that find themselves in the crosshairs of health campaigners - alcohol and carbonated soft drinks. In 2016, 29pc of Ardagh's packaging sales were to the beer industry while a further 7pc went to wine producers and 6pc to spirits distillers, ie 42pc of the group's sales are to customers in the alcohol industry. Another 21pc of Ardagh's sales were to carbonated soft drinks customers.

While chief executive Ian Curley points out that much of this packaging is for bottled water rather than sugary drinks, relying on alcohol and carbonated soft drinks producers for almost two-thirds of its sales represents at least a potential vulnerability for Ardagh.

A more immediate threat to Ardagh is the speed with which its major customers in the food and alcohol industries are consolidating, with Kraft and Heinz merging in 2015 and AB InBev gulping down SAB Miller in 2016. While Kraft Heinz failed in its recent approach to Unilever, stand by for more mega-mergers and takeovers among Ardagh's customers.

With the exception of Brazil, Ardagh's operations are largely confined to Europe, which was responsible for 53pc of 2016 sales, and North America, which contributed 40pc. These are both relatively mature markets. This almost certainly means that Ardagh's next major acquisition will be outside of its existing core markets.

While last week's IPO raised just over $320m (€298m) net, when the extra 2.4 million shares set aside for the underwriters are added, it does give Ardagh a new currency to fund acquisitions rather than having to rely exclusively on debt.

Ardagh's new shareholders own just over 7.8pc of the company. However, the Class A shares issued to outside shareholders will have just one vote each compared to 10 votes each for the Class B shares owned by the existing shareholders. This means that the new shareholders will have less than 1pc of the votes. In addition to having a two-tier voting system, Ardagh will continue to have a labyrinthine ownership structure post-IPO.

Luxembourg-registered ARD Holdings sits on top of the Ardagh pyramid. It owns ARD Finance, which in turn owns over 77pc of the shares (along with more than 82pc of the votes) of Ardagh Group, the company whose IPO took place last week. ARD Finance also owns ARD Group Finance Holdings, which owns 15pc of the Ardagh Group shares (and 16pc of the votes).

Companies owned by Coulson own 25pc of ARD Holdings with another Coulson-owned entity owning a further 34pc. This means that, despite the issue of 18.6 million new shares in the IPO, Coulson continues to have control over the Ardagh Group, both through ARD Holdings and ARD Group Finance Holdings.

Coulson is completely unapologetic about this two-tier voting system."If people don't like the idea of my control then they shouldn't be here anyway," he says.

He also points out that two-tier voting structures are relatively common in US IPOs. Google, Facebook and Alibaba are among those with two-tier shares to have floated in the US in recent years, while outside shareholders got no votes at all in this month's Snapchat IPO.

In practice, a two-tier voting structure will only be of interest to corporate governance anoraks if Ardagh continues to perform.

Coulson is optimistic that it can. "People have got to eat and drink. That makes it a steady business."

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