Battle of glass titans rages across the water

As Quinn makes inroads into British market, Ardagh goes on defensive, writes Una McCaffrey

The stage is set, the players are ready and the audience is in place: welcome to the great British glass battle of 2006.

The plot of this drama may not immediately capture the imagination but, for the players involved, there is much at stake.

At one end of the glass battle stage we have Seán Quinn, the feisty Fermanagh entrepreneur who has no fear of taking on the big boys and has a near-consistent history of winning.

And at the other side, behold Paul Coulson, aka "The Cooler", the equally brave and equally tough Dublin financier who has no intention of letting any competitor take away any of his business base.

The unlikely battleground is the UK's glass packaging market, hardly the sexiest stage in the world but one that is worth a cool £600 million (€879 million) and in which Quinn and Coulson - via his controlling holding in Ardagh - could between them hold about 60 per cent by the end of this year.

For this to happen, Quinn Glass needs to get its new plant at Ince in Cheshire up and running over the next few months. The plant will have the capacity to produce 1.2 billion glass containers per year, roughly 16 per cent of the UK market.

Industry research suggests that Ardagh's share of the market will fall from 50 per cent to between 40 and 45 per cent when Quinn is in full production.

In 2004, Ardagh had a turnover of about £322 million, of which £180 million came from the UK.

Quinn says glass operations account for less than 10 per cent of group's turnover (last year about €270 million) and will continue to do so even after the new business is in full production.

Naturally, the incumbent feels something of a threat. And just in case it doesn't, there is no shortage of comment around to remind everybody of the changing face of the marketplace.

In the last month alone, two international ratings agencies have raised the spectre of Quinn when voicing concerns about Ardagh's credit ratings. The most recent pronouncement - from Standard & Poor's - brought a reduction in the glass-makers ratings and a warning about the possible loss of contracts to Quinn Glass in the short to medium term. The problem, said the analysts, is one of overcapacity at a time where costs are rising. Margins are getting squeezed, particularly because of higher gas prices.

And in the background, customers are highly concentrated, with two-thirds of Ardagh's sales made to its top ten customers.

While Standard & Poor's had no immediate concerns about Ardagh's liquidity, it suggested that necessary capital expenditure at the firm (about €35 million) could lead to it being "free cashflow negative" this year.

It is, therefore, perhaps natural that Ardagh has not offered Quinn that traditional Irish welcome to England. To reinforce this, the firm has gone on the offensive by buying up the third-largest UK producer, Redfearn, for £50 million and adding it to its own business, Rockware.

Redfearn had a turnover of about £101 million in 2004, most of which was achieved in the UK.

The consolidation reduced the number of large players in the market from four to three, with the remaining two being Quinn and United Glass, a division of US firm Owens Illinois (OI).

The second strand of Ardagh's strategy to deal with the new reality has been to block the development of Quinn's new Cheshire plant at every turn.

In this respect, Ardagh (via Rockware) has had some success, managing to get the UK high court to overturn Quinn's planning permission for the £200 million plant in June last year.

Quinn got planning permission from Cheshire city council in 2003 to operate two furnaces and eight glass making lines. Later plans became much more ambitious: the company now wanted to have two larger furnaces and 13 production lines.

The council, which must have been aware of the jobs implications of any planning decision, allowed the changes without an environmental impact statement, but this approval was stymied by Rockware's court challenge.

Rockware argued that the plant was being built illegally, a contention which is the subject of a counter-challenge.

Quinn subsequently submitted a new planning application that included an environmental impact statement and this is currently the subject of a local public inquiry. The inquiry is due to conclude towards the end of next month and will then report to the office of UK deputy prime minister John Prescott within the following 12 weeks.

Prescott then has another 12 weeks to make his decision, with most expecting a determination before the end of the summer.

It would be natural to think that this has delayed Quinn's plans for production at the new plant, but it seems this is not the company's style. In fact, Quinn has gone ahead with firing up its plant and is currently running at 50 per cent glass manufacturing capacity. Full production is scheduled for the end of this year.

"There is nothing illegal in Quinn Glass proceeding in this manner," a spokesman said for the company this week.

"Had the councils or the office of the deputy prime minister considered that Quinn Glass was doing anything illegal or of detriment to the local environment, they were at liberty to take enforcement action to stop the development. They have not considered this necessary."

The spokesman also said that when Prescott "called in" the matter for his consideration (this does not always happen), it was almost built, with more than 100 local staff already recruited.

Quinn was so confident of its position that at one stage it threatened legal action against Prescott's office. This rather tantalising prospect has now faded however, with the spokesman saying the firm had concluded "the quickest way to resolve the issue was to allow the public inquiry to proceed".

As for the Rockware strategy, the Quinn spokesman said it was "up to people to draw their own conclusions".

He added: "This is the most environmentally friendly container glass plant in Europe. We look forward to the completion of the inquiry and to our position being fully vindicated".

Perhaps conveniently, as the endgame approaches, there have recently been whispers that Rockware's own four plants (Redfearn has another one) may not be the most up to date on the environmental front themselves.

For its part, Rockware would argue that the required environmental standards are higher for new plants than for existing facilities that have ongoing production commitments. The firm points out that it invested more than £25 million in the environmental aspects of its plants last year.

Rockware was less keen than Quinn to answer questions about the companies' differences this week, with a spokesman referring this reporter to an official UK government document when asked about the wider state of the UK glass market.

The report in question, the Competition Commission's determination on Ardagh's purchase of Redfearn, concluded that future UK demand for glass containers would "remain broadly stable or at best show modest growth of 1 to 2 per cent a year".

This matches the view of the British Glass Manufacturers' Confederation, the Sheffield-based representative body for the UK's glass industry. Director general David Workman says growth in the industry over the past 20 years has averaged at between 1 and 3 per cent annually.

While Workman, who counts both Ardagh and Quinn among his members, would not comment on the difficulties between the two, it does not require much expertise to work out that the entry of a large, new competitor into a mature industry such as this will make waves.

Price increases will be difficult to push through at a time when margins are already under pressure because of soaring energy prices. Simultaneously, competition from overseas locations such as the Middle East is heating up.

Manchester-based research house Market & Business Development (MBD) reckons that imports of glass packaging will grow by 17 per cent between 2005 and 2010, reaching £130 million.

Workman is optimistic, however, noting that the trend towards manufacturers also filling the containers it makes (Quinn can do this but Rockware cannot) could grow the market.

As befits somebody in his position, Workman needs to be positive. It would not be shocking, however, to learn that industry players other than Ardagh and Quinn would like the two to kiss and make up without bringing further unpleasantness to the market. While it is generally a mistake to play up the existence of bad blood in the business world, there are long-standing reasons for it in this relationship.

The first issue between Quinn and Coulson arose in 1998, when the Fermanagh man fired up his first glass bottle plant at Derrylin in his native county.

Before long, Ardagh's Dublin-based Irish Glass was run out of business, with 300 staff losing their jobs in the process.

In the wake of this, Quinn made a bid for the bits of Ardagh's business that the firm wanted to hive off into a new Guernsey-based company. In this instance, Quinn failed and the move to Guernsey went ahead.

Last year, the Guernsey company was the subject of a controversial leveraged takeover by Caona, a vehicle controlled by its largest shareholders, Coulson and Yeoman, his 33 per cent owned investment vehicle. In documents relating to a bond used to finance the deal, Caona highlighted the new Quinn plant as a serious threat to its business.Public comments on the matter are, however, rare on both sides.

Even without any real sense of how either company is feeling, the battle will continue, with 2006 or 2007 likely to provide this story's conclusion. With such determined players at both ends of the stage, the story is unlikely to produce a clear victor.