Almost a year to the day since Dermot Desmond sold his 25 per cent stake in plastics group One51, it became clear this week how the billionaire was, once again, on the right side of a deal.
The company, which was renamed IPL Plastics late last year and which continues to have about 2,000 Irish investors, revealed on Tuesday that its long-awaited Canadian initial public offering will be set at the equivalent of €1.79 to €2.13 per share.
It marks a significant discount to the €2.50 price at which Desmond is said to have sold his holding to Canada's Caisse de Dépôt et Placement du Québec (CDPQ) last May. And it raises questions about the logic of why a €2.50 a share bid last October for the group – by UK private equity firm CapVest, led by Cavan man Séamus Fitzpatrick – was shot down.
Set up in 2005 as a spin-off from IAWS (now Aryzta), One51's founding chief executive Philip Lynch, trading off past glories, raised €300 million in cash and €440 million in debt over three years investing in a ragbag of companies. When the downturn came, hundreds of millions of euro of writedowns ensued, prompting angry shareholder meetings, boardroom bust-ups and the ousting of Lynch in 2011.
Lynch's successor, chief executive Alan Walsh, has spent more than six years unravelling the group's previous collection of disparate investments – including a stake in ferries operator Irish Continental Group, Irish Pride Bakers and hazardous waste businesses.
He has also been happy to use the company chequebook trying to develop the company into a focused rigid plastics maker, whose products range from margarine containers to refuse bins and returnable, foldable plastic boxes.
Earnings in recent years have been driven by the group's 2015 purchase of a 67 per cent stake in North American company IPL Inc, with the remaining holding left in the hands of CDPQ and fellow Canadian investor Fonds de Solidarité. (Hence the decision to rename One51.)
Earlier this year, CDPQ and Fonds de Solidarité swapped their interest in IPL for shares in the group in a deal worth almost €120 million. The deal settled the two Canadian firms’ right to force One51 to buy them out in 2021 – a liability that had mushroomed from €32.4 million to €119.8 million as a result of how well the investment had done.
The “swap-up” was settled at about €2.50 per share, but the price CDPQ has paid has effectively given the Canadian firm the right to call all the shots.
"CDPQ will have significant influence with respect to matters put before the shareholders," IPL Plastics warns in its IPO prospectus. "This concentration of voting power may cause the market price of the offered shares to decline, delay or prevent any acquisition, or delay or discourage takeover attempts that shareholders may consider to be favourable."
The document also highlights the risk that CDPQ's "interests may not in all cases be aligned with interests of our other shareholders" and it may have an interest in pursuing deals that "might involve risks for other shareholders". (The other shareholders currently include beef magnate Larry Goodman, Kerry Co-op and a slew of high-net-worth individuals who originally backed Lynch.)
In the meantime, the two Canadian firms are collecting 10 per cent annual interest on 45 million Canadian dollars of subordinated loans given to IPL Inc in 2015, which do not have to be fully repaid until late 2023.
With the IPO set to price below Desmond’s trade and the CapVest proposal, patient veteran shareholders – such as the man who stood up at an extraordinary general meeting (EGM) last week to say how his 13-year-old investment has now become a “nursing home project” which will “determine the quality of care” he gets later in life – are wondering when they’ll see a return.
It comes at a time when the company's closest peer, Indiana-based plastics packaging company Berry Group, has seen its share price fall by more than a fifth since late January, with the decline accelerating in the past month on Wall Street as it reported weaker-than-expected quarterly earnings.
Walsh also warned at the EGM last week that IPL Plastic’s own profit margins continued to be squeezed in the first quarter of this year, having been hit in the second half of last year as a result of spiking raw material resin prices and US transport costs amid tougher rules on truckers’ driving times.
But, while the value of the CapVest proposal last year would seem attractive now, it’s understood that plan involved a number of investors rolling over their investment into a leveraged vehicle.
Meanwhile, it’s believed that IPL Plastics, which had indicated it is seeking to raise as much as C$200 million, now plans to sell about C$150 million of stock next month, to limit the dilution of existing shareholders.
Current investors, who face being locked in for six months after the flotation, have until next Thursday to take up an offer by the company to buy back their stock at the price of the IPO. Having been a rollercoaster of an investment for more than a decade, it’ll be interesting to see how many decide to get off now.