A LOT OF BOTTLE: Paul Coulson’s audacious bid to make Ardagh the world’s biggest glass bottle company could be shattered by a US federal inquiry
06 October 2013
By Brian Carey and Samantha McCaughren
Last week, the Statue of Liberty was closed to the public. As Congress and the White House squabbled over healthcare reforms and budgetary ceilings, visitors to New York city were denied access to the landmark monument because of the so-called government shutdown.
In Washington, the effects of the shutdown could curiously play into the hands of one of Ireland’s most swashbuckling entrepreneurs, and his ambition to build the world’s biggest glass bottling company.
October 17 was slated as the date for an injunction hearing into the Federal Trade Commission’s (FTC) plan to block Ardagh’s audacious $1.7bn (¤1.3bn) purchase of Verallia North America (VNA), a rival glass bottle maker.
Lawyers for the commission last week sought and were granted a delay in the hearing because of the shutdown. The additional time could benefit Ardagh and Paul Coulson, its chief executive.
With the FTC virulently set against the merger, last month Ardagh submitted a possible remedy to smooth the deal, offering to sell four of the merged group’s 22 glass bottling plants.
Ted Hassi, the FTC’s head of litigation, dismissed the plan as “11th hour” and “gamesmanship”. Presiding judge Barbara Rothstein ruled that, while the Ardagh offer was too late to be considered in the injunction hearing, she did urge that the parties “sit down and talk”.
The FTC needed to “express a willingness to examine the plans”, Rothstein added, and Ardagh “needs to put those plans in as much detail” as it can, and present something “definitive”.
The shutdown just bought Coulson another week, at least.
COULSON’S charge into the American glass bottle market is not just audacious, it raises the bar in terms of ballsy dealmaking. In early 2012, Ardagh had no glass bottling business in the US. It bought Leone Industries, a mid-sized bottler, for $220m in March 2012, then followed that up with the purchase of Anchor Glass Container, the No 3 player in the market, for $880m.
Snaring VNA, part of the giant Saint-Gobain group, would catapult Ardagh into the lead spot in the market, with a 49% market share. It would also add a further $1.2bn in sales to the operation.
The American landgrab was all achieved within 24 months. The move was also expected to pave the way for a flotation of Ardagh on the New York stock market.
Standing in Coulson’s way is Hassi, a formidable litigator who spent eight years as a navy officer before qualifying close to the top of his class at Fordham University School of Law. When Barack Obama was elected US president in 2008, he committed to toughening the policing of mergers and acquisitions, partly to drive through his healthcare reforms. Hiring Hassi from a private law firm was very much part of the new FTC.
In its complaint over the VNA deal, the commission flagged up its concerns over the rapid consolidation of the glass container market in America. In 1983, there were 121 glass container plants in America run by 23 different manufacturers, 19 of whom operated one or more plants.
Today there are 47 factories. Only the “three majors”, Owens-Illinois, VNA and Coulson’s Ardagh, operate more than one glass packaging plant. The commission says that the “three majors” have shut excess capacity and pursued “price over volume” strategies. With capacity tight, they demanded “cost pass-through provisions” in contracts where increases in raw material and energy prices could be fed into prices. This led to higher margins. An industry that seemed inherently unprofitable had become extremely attractive.
The domination of the three companies has piqued the FTC’s interest. The VNA acquisition would mean Owens-Illinois and Ardagh would become effectively a duopoly, leading to “higher prices, lower availability and less innovation”, particularly in beer and spirits packaging. The deal is critical to the future growth of Ardagh. “I would think that they need the deal reasonably badly,” said Jayanth Kandalam, a senior credit analyst at Lucror Analytics.
The deal rebalances Ardagh, reducing its exposure to both slow-growing Europe and lower-margin metal packaging.
Kandalam added that Ardagh needed “a strong and reliable offset” to troubles in its metals portfolio.
Coulson made a big noise in the tin can business when he bought Impress for ¤1.7bn in 2010. Yet the unit has struggled in the past year. In the second quarter, sales were down 9% and profits fell by 32%.
Jyske analyst Bo Andersen noted that the division was suffering from “falling demand, poor product mix and lack of possibility to pass on rising commodity prices to customers”.
The result represented an “escalation of the negative development” in four consecutive quarters, according to Jyske.
While Ardagh has countered that the metal business— heavily skewed towards food manufacturing clients — was hit by the long winter and late harvest and has since managed to pass on cost increases, Coulson has initiated a root-and-branch review of costs in the company. It could move to close down factories and cut capacity.
Metal packaging also dragged on the company results in a polar opposite way across the Atlantic. Coulson is building two massive metal can facilities: one in Virginia and a second planned for the west coast. The total cost will be $250m.
The Virginia factory will satisfy 5% of the total demand for tin cans in America, and its production is secured on a 10-year supply deal with ConAgra, a firm that proudly boasts to have its food in “97% of American homes”.
Production will come on stream in 2015 and, until then, Ardagh will be facing start-up costs and no income. The pressures of the metal business make landing the Verallia deal, and getting the FTC’s approval, all the more urgent.
The company has pegged its hopes there on a divestiture programme which involves four large plants. Ardagh says that the four plants account for $400m in sales, and would give up the equivalent of 100% of its current beer bottle production and Verallia spirit packaging business.
It would create a substantial new No 3 player in the market.
Hassi remains unconvinced. “We don’t know if four plants can be combined into a business that can be competitive,” he told a court hearing last month. He also criticised the absence of an agreement to sell the factories to a single buyer.
Ardagh’s legal representatives argued that seeking a sale agreement was an “unfair standard”.
It also said that the remedy had always been proposed to the US government in settlement talks and that talks were advancing with interested parties.
Judge Rothstein suggested that it was nowtime “to switch gears” and see if “there is a chance this can go away”.
If it cannot go away, then Ardagh will face two separate court dates. Later this month, the FTC will seek a preliminary injunction officially blocking the transaction, and in December the case will go to a full administrative hearing.
While the shutdown delays will give more time for talks between the FTC and Ardagh on a compromise, any further delays might also work against the Irish company. The financing for the VNA deal was the cheapest money Ardagh ever accessed. At a blended interest rate of 4.87%, Coulson exploited a real sweet spot in the corporate bond market.
The bonds do contain a so-called 101 special redemption clause and could conceivably be called in January 2014. The company can seek a “consent solicitation”, pushing back the redemption date, most likely at a cost.
The uncertainty has meant Ardagh’s debt—ithas at least nine separate bonds in issue—has underperformed the corporate bond market since August. Jyske’s Andersen has tagged a sell recommendation on two bonds issues. “The deteriorated situation in the metal division makes it even more difficult for Ardagh to convince investors that Ardagh is a good growth story,” Andersen wrote in a note.
He expects that the newsflow “will continue to be negative”.
The FTC wrangling has also pushed back the planned IPO. It was expected that Ardagh would raise $1.7bn in a flotation that could reduce its massive debt pile to $4bn. It was speculated that the equity in the company—Coulson owns 40%—could be worth $1.3bn. A failure to consummate the VNA deal would severely dent the IPO story in America, and might even torpedo the flotation entirely.
JP Morgan, in a recent note, said that a failure to do theVNAdeal would bea “disappointment”, but more of “an equity issue than a credit issue”.
A SETTLEMENT around the divestiture programme would certainly ease nerves, and the shutdown has bought Ardagh more time.
Without the deal, growth options will be restricted. “Europe’s glass industry is more mature and consolidated, and growth is slow,” said Lucror Analytics’s Kandalam. Ardagh “may also look to eastern Europe, but again the deals will be smaller in size”.
The other option, Kandalam added, is to participate in a gradual consolidation in glass in the US and metals in Europe.
“It’s a time-consuming process,” he said. “With VNA they will get better scale, but it will be a time-consuming process for management to integrate.”
This weekend, President Obama cancelled an eight-city trip to Asia because of the “difficulty in moving forward with foreign travel in the face of a shutdown”.
Previously, there have been 17 government shutdowns in America since 1976. The last one, in 1996, lasted for a record 21 days.
An early resolution will depend on the White House striking a deal with Congress on the cost of “Obamacare” and a new debt ceiling.
Meanwhile, Ardagh will be hoping to use the downtime to strike a deal of its own by finding abuyer of its four sacrificial glass packaging plants. Presenting such a deal to the FTC might just sway the authorities.
“Frankly, it would do you more good than harm if... the whole thing went away and the divestiture plan was approved,” said Judge Rothstein.
Coulson no doubt would agree.