Tuesday 23 January 2018

Is Coulson's glass at Ardagh half-empty or half-full?

Richard Curran

Richard Curran

Paul Coulson made a big bet on tin cans in September 2010. The chairman of packaging and glass giant Ardagh, decided to spend around €1.7bn buying a massive metal packaging business. It made tin cans for Heinz and all kinds of metal containers.

The deal doubled the size of the Ardagh group and put it on a world stage. It was largely financed with debt. Since then, Coulson has gone on a massive buying spree having borrowed €3.5bn on 10 acquisitions by 2013.

The buying and borrowing didn't stop there. In 2013 he announced the purchase of Saint Gobain's North American Verallia glass-making business for €1.2bn.

Now St Gobain is selling the rest of its glass packaging business. This will be a mega deal worth around €3bn. First round bids are in and a shortlist will be drawn up in the next week. No doubt Coulson is tempted?

He must be. But surely it is time to stop buying. Debt is incredibly cheap now, thanks to the ECB printing money, and some corporations can re-finance debt at practically negative rates on the bond market.

Ardagh has been improving its own debt position by re-financing at cheaper rates, which will save it a packet in interest payments. Its interest-to-earnings ratio improved to 2.4x last year - but that doesn't mean it is time to go again for another €3bn.

Coulson might see Saint Gobain's Verallia glass business as the last big piece of a huge jigsaw that would complete the picture of a completely consolidated global glass industry - with him at the centre of it.

The problem is that the numbers and the business keep getting more complicated for Ardagh. The metals business has been slow to deliver.

Revenues are virtually static while Ebitda in metals is down from €298m in 2011 to €213m in 2013 - a 29pc drop. It climbed 16.9pc last year but was still well below when Ardagh bought it. Ardagh also took €224m in impairment charges in the metals division in just two years.

Yet, for all that, the glass businesses Coulson has bought are going better. Glass manufacture has better margins and Ardagh has grown its margins further in 2014. Hence, the temptation to keep buying glass.

Ardagh has been talking about an IPO for nearly five years now. After continually putting it back, its latest plan is to float the metals business. Its numbers are improving but it might still be a hard sell for punters.

It has dragged down Ardagh's overall performance in recent years. The 2014 accounts show better earnings growth but it has come at a price.

Ardagh is a huge player in global packaging now but still made a loss for the year of €391m after taking €475m in exceptional charges.

Its debt bill is enormous. Net debt stood at €4.7bn last year, up from €3.6bn in 2013. At the end of 2014, Ardagh had about €1.3bn more in liabilities than in assets. Of course, in the short term its about servicing and refinancing those debts, which it can. But at some point the business has to stop losing money.

Ardagh has been widely tipped to bid for the St Gobain glass business. It might be frustrating if he doesn't go for it, especially given that his glass division made nearly double the earnings of the metals division on the same turnover in 2013.

But Ardagh still has work to do maximising what it already has. Coulson paid a hefty price for the Verallia North American business and it has to be integrated and sweated.

Coulson has ambition and guile but he is also not afraid of leverage. It might be better to sit this one out.


Doughty Hanson prepares to make an exit from TV3

The suits at private equity firm Doughty Hanson may not want to hear the words "Ireland" and "TV" mentioned over pints at their London local.

With speculation that TV3 could be sold shortly, Doughty looks set to realise its losses on the €265m acquisition of TV3. This follows the €100m it dropped when Setanta's UK operation went under in 2008.

Doughty stuck around €140m into the TV3 acquisition and borrowed a further €120m from Anglo Irish Bank in 2006. Anglo parked €81m of that in 2009 -which meant Doughty didn't have to pay interest or make repayments until TV3 was sold.

Then Doughty bought back its debt from Anglo for €8.9m below or just below par.

A sale of TV3 for, let's say €40m, would see Doughty's losses on Irish TV companies hit over €320m.

As for TV3, it has done remarkably well during a recession that collapsed everybody's revenues. It has done some things the hard way by generating more Irish content and it should be commended for that. Making your own content is costly and risky - but it can pay off in the long run if you get it right.

Despite the downturn it has invested in drama, factual programming and a €4m HD studio. But just as TV3 was getting ready to benefit from any upturn in the economy, UTV rained on its parade with the launch of UTV Ireland.

Rather than buy TV3 at the time, UTV management obviously felt it was better to try and nuke them by tying up three shows that accounted for one-fifth of the station's viewers.

In 2013, TV3's operating profit fell by 19pc to €1.1m while turnover fell by €55.9m. The station has probably improved its performance last year and would have expected to do better again in 2015 if it hadn't been for UTV's arrival in Dublin.

The danger for any buyer of TV3 is that UTV's presence makes it harder for either of them to make money. Fragmentation of viewership and advertising is punishing Irish channels and domestic programme-making.

Speculation is pointing towards Carlyle Group, together with Cardinal Asset Management, as a buyer for TV3. This would have to be a pure recovery play. TV3 runs a very tight ship and there is little that could be done to squeeze costs further.

The longer term game might be to buy TV3 at a bargain basement price and wait for an opportunity to bid for UTV. This could build a stronger all-island business, in which they are not cancelling each other out.


Re-floating the Permo was a titanic job

IT would have seemed easier to re-float the Titanic than Permanent TSB just a couple of years ago. But Permo is coming back and based on valuations being talked about, chief executive Jeremy Masding should be congratulated for getting this far.

Or are the estimates being talked up a little? If the IPO pays €400m back to the State in return for 25pc, the bank is valued at €1.6bn. Dropping down to 70pc would see the exchequer bag a further €80m.

The State's hit from the bailout of the mortgage lender would still be €1.1bn, or less as the shares increased in value.

Very high mortgage rates and very little competition in banking are helping the Permo story.

With Bank of Ireland and AIB so dominant, it is better to have PTSB there than not at all.

Who will be first to utter those three little words "third banking force"?


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