Paul Coulson’s big bet on cans leaves Ardagh disciples waiting

Paul Coulson has been high up on the Christmas card list of global "junk bond" and mergers and acquisitions (M&A) bankers for more than two decades.

He has paid them a lot of fees, having spent more than €7.5 billion on swashbuckling deals building Ardagh Group into one of the world's largest glass and metal containers beasts – with the help of regular trips to the riskier end of debt markets.

The business case was simple. In the low-growth markets for glass bottles and drink cans – which are highly correlated to economic activity – the way to expand earnings was to acquire businesses, backed by borrowings, and scrape out cost savings.

The bond markets’ love affair with “the Cooler”, as he is known, is unparalleled in Irish business circles and he has rarely missed a beat going back to investors to refinance borrowings at more favourable rates when windows of opportunity open. Between April and June, Ardagh sold more than $3.3 billion (€2.8 billion) of bonds to replace existing debt at cheaper rates, as central banks poured trillions into the financial markets to prevent the system from seizing as Covid-19 swept through western economies.

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But Ardagh, let’s face it, has had an up-and-down relationship with equity markets since it floated in New York in early 2017. It has struggled to really lower its debt burden as its North American glass bottles business, in particular, has been the source of earnings disappointments.

Even spinning off its food and speciality metal cans business last year into a joint venture, 57 per cent-controlled by a Canadian teachers’ pension fund, hasn’t done much to move the debt dial. The group’s net borrowings stood at $5.55 billion at the end of June, equating to a high level of 4.9-times earnings before interest, tax, depreciation and amortisation (ebitda).

However, Coulson's move into the beverage can-making market in 2016 – when it bought $3.4 billion of assets from US packaging group Ball and UK rival Rexam as they off-loaded 22 plants to appease competition authorities in their own merger – now looks inspired.

Real growth story

Whether by accident or design, Ardagh, which makes drink containers for brands ranging from Budweiser to Coca-Cola, has found itself in the middle of a real growth story in the ordinarily staid world of packaging.

The cans business, which now accounts for half of group sales, is not able to keep up with a growing demand for canned energy drinks, flavoured beverages and craft beer as well as an ongoing shift away from plastic packaging.

While there was a drop-off in glass sales earlier this year, as bars, restaurants and cafes were hit by intentional lockdowns, the drinks cans business saw no such hit. Covid-19 has served to increase public awareness about the environment, accelerating demand for cans – albeit some of it at the expense of glass.

Ardagh has already pre-sold all the cans it can make this year and next, Coulson told analysts on a call on Thursday as the group reported its latest batch of quarterly results.

But while he has historically relied on his M&A bankers to turbo-charge expansion, he signalled a change in tack this week: announcing a $1.8 billion investment plan, the group’s biggest ever, mainly to build out its can-making facilities over the next four years.

This will be largely funded from existing cash, currently at $1.23 billion, and money being generated by the business – with fresh borrowings being used as a last resort. Significantly, the expansion plans are backed by customer contracts, according to Coulson.

“We plan to grow our business of beverage can capacity from 36 billion cans at the time of our acquiring the business in 2016 to 55 billion cans by the end of 2024,” he said.

Equity investors lapped up the news, with the shares soaring almost 12 per cent on the day on Wall Street, even as analysts remained more cautious about Ardagh’s glass business, given its exposure to pubs and restaurants as pandemic restrictions are being tightened internationally.

Investor enthusiasm

The new investment drive will, of course, mean that debt pay-down will be on the back burner for the immediate future – which will limit general investor enthusiasm for the stock. Ardagh, which traces its roots back to the long-shuttered Irish Glass Bottle factory in Ringsend in Dublin, won't see real earnings growth from the programme until 2022.

At the moment, only 8 per cent of Ardagh’s shares are tradable. The remaining 92 per cent is held by a holding company whose investors include Coulson, company managers and high-net-worth disciples who backed the businessman as he took a predecessor of the group off the Irish stock market in 2003.

While Coulson dangled the prospect 2½ years ago of the long-standing indirect shareholders group getting their hands on tradable shares – or the holding company selling shares into the market to lower debt levels – the businessman this week ruled out anything happening until there is a marked improvement in the share price.

The market may wait, according to analysts, until there are clear signs that the investment programme is delivering.