Ardagh opts to fight for its survival

Ardagh, the former Irish Glass Bottle Company, had a stark choice. It could lie down and die, or it could fight. It has chosen the latter. With Mr Sean Quinn's Northern Ireland glass plant scheduled to come on stream next summer with a capacity of 170,000 tons, or 30,000 more than the combined markets of the Republic and Northern Ireland, Ardagh had little option. Long criticised in the past for not diversifying and using its cash hoard, it has decided to act, and act positively.

Announcing its new strategy, Ardagh is emerging with renewed vigour, contrasting with the rather lethargic attitude displayed up to now. Will this new strategy work, or will it unravel, in a few years time, like ageing sticking plaster?

It would have made a lot of sense had the cash been used to diversify into a growth area. That did not happen. It has had a virtual monopoly of the Irish market - well over 80 per cent - with good returns (over 20 per cent on tangible assets). Comparing these returns with what was available elsewhere could well have inhibited new investment decisions. Ardagh, however, in the absence of bad investments, remains intact. It is in a strong financial position, with £14 million cash. It also has surplus assets that can be converted into cash. It is, therefore, well capable of financing the new £25 million expansion at its Ringsend, Dublin, site, without recourse to shareholders. That expansion, in conjunction with the reduction - from 390 to 240 - in the workforce, should considerably reduce unit costs. And importantly, Ardagh is expanding in an area it knows best.

The potential downside is the expansion into an area with surplus capacity (and a growth in demand of only 2 to 3 per cent). Ardagh's expansion - from a capacity of 125,000 to 170,000 tonnes per annum - together with Mr Quinn's new plant, will increase that capacity still further. That brew could be an explosive cocktail with the ability to destroy, or at the least hurt, some of the participants. Mr Quinn will not now find easy pickings in the Republic's market. Ardagh's new capacity will be coming on stream at a similar time to Mr Quinn's, and Ardagh can be expected to defend its patch with vigour. The net result will be lower prices, and the focus, both by Mr Quinn and Ardagh, is likely to be on the UK market, which has an estimated demand for two million tonnes.

This market has three major players - United Glass, a US group with an estimated 35 per cent of the market; Rockware (35 per cent); and PLM Redfearn (a Swedish company) with some 20 per cent. Rockware, which has an influential 21.5 per cent stake in Ardagh, can hardly welcome the extra competition induced by the Dublin company. It is currently owned by BTR, which is selling its packaging division, and is likely to have a new owner. That owner could well sell the stake in Ardagh. Ardagh's new capacity would represent only 2.5 per cent of the British market, while Mr Quinn's entire capacity would represent 8.5 per cent, making his development much more ambitious.

The potential from Ardagh's £25 million investment far outweighs what it gets from the cash hoard. The interest on the cash represented only 16.9 per cent of last year's pre-tax profit. But capacity is being boosted by 40 per cent.

The extra competition is bound to lead to lower prices for the glass products. But its strategy to move into niche areas in the UK market makes sense and, if the lower costs result in a maintenance of margins, then that extra capacity has the ability to boost profits by a similar percentage. That would make the exercise worthwhile.

There will, of course, be exceptional costs along the way. Redundancy costs could amount to some £4 million, which may be borne in 1997/8. It could be 1998/9 or later before any benefits accrue.

However, Ardagh is not standing still any more and is meeting the forthcoming extra competition in a bellicose mood. If that mood can be maintained and if (as claimed by Ardagh) the new investment makes it among the most competitive in the industry, then expect some excitement ahead.