Less than year after shelving plans to float part of its business on the New York Stock Exchange, packaging giant Ardagh is planning a second tilt at Wall Street.
This week Ardagh signalled to bondholders that it is going to file an application with the US Securities and Exchange Commission (SEC) to list shares on the New York market. Assuming all goes to plan, its initial public offering of the stock should go ahead during the first half of next year.
Following five years of debt-funded acquisitions, Ardagh now owns 110 factories in 22 countries that employ 23,000 people and generate almost €8 billion a year supplying bottles and tins to the likes of Heineken, Budweiser, brewer Inbev, food processor John West and manufacturers of consumers goods such as L'Oreal.
This time around it is looking at a markedly smaller flotation. The Irish group intends to raise about €270 million from the sale of 5 per cent of the shares in its operating company on the market, which would value Ardagh at about €4.5 billion. The expectation would be that, in time, more of the company would be sold off to investors.
Last year Ardagh had hoped to earn €2 billion by floating all of its metal packaging business, Oressa, in New York. It intended using some of the cash to cut its debts, which then stood at more than €5 billion. However, in November it decided to hold off in the face of market volatility.
The plans to go to the market followed acquisitions that grew Ardagh and its debts. In June it bought a number of drinks-can factories that rivals Ball and Rexam had to sell as a condition of competition regulators allowing them to merge. As a result, it will have revenues of €7.8 billion a year and earnings of €1.4 billion. But its debts will grow to €8 billion.
Ardagh first began considering the Oressa flotation in 2014, after its takeover of bottle-maker Verallia North America, which brought revenues to more than €5 billion a year, earnings to €950 million and debt to €5.2 billion. Following the deal Ardagh considered bringing in private equity investors, but when they were not willing to pay what the company believed its shares were worth, it opted for the stock market.
Once again it has chosen to go this route. As it intends to float 5 per cent of its operating company on the market, leaving the remaining 95 per cent in the hands of the parent, Ardagh Packaging Holdings, current shareholders will not benefit directly from the planned flotation.
Instead, those investors, who include the group's chairman and chief architect, Paul Coulson, will share a €270 million dividend that Ardagh is funding from a bond issue and refinancing that will lay the ground for the stock market launch.
On Wednesday, Ardagh raised $1.715 billion through a bond issue. It will use part of it to pay off €1.21 billion in payment-in-kind (PIK) notes that fall due in 2019 and on which it is paying more than 8 per cent interest.
The balance will go towards the €270 million dividend and to paying off some of its debt. The new notes mature in 2023 and the interest payable is 6.8 per cent, so the exercise gets rid of shorter-term liabilities and cuts borrowing costs.
Coulson has characterised PIKs as an “equity substitute”. The notes that Ardagh refinanced this week helped form the basis for the group’s largely debt-funded buying spree that has seen it become one of the top three in its industry.
Typically borrowers make no repayments on PIKs until the debt falls due, or is refinanced. This means that interest builds up over the life of the loan. So the lenders or note-holders sit back and watch the value of the investment grow over that time. However, PIKs rank behind senior debt, so the extra risk means that they have higher interest payments.
The bonds that Ardagh issued this week are known as “toggle” PIKs. In this case the borrower makes regular interest payments. The group’s holding company will assume this liability and use regular dividends from the operating business to pay the interest.
By structuring it in this way, Ardagh cuts the operating company’s borrowings and leaves it with debt amounting to about five times its earnings, a ratio that management will hope will be acceptable to prospective buyers of its shares. As an added incentive, they, along with the holding company, will receive regular dividends.
Sources say that given that Ardagh has previously gone some way down the road towards a flotation, it should have a good idea of what equity investors are likely to want from the business, and so it has structured its debt with them in mind.
That still leaves the group with large liabilities. There is no indication that the ratings agencies, which assess a company’s ability to repay its debts, are likely to change their views of Ardagh in light of this week’s refinancing. They rank it as a “B”, which is a relatively high risk, subinvestment grade rating, but one that is in line with other European players in its industry.
One of those agencies, Moody’s, has given Ardagh a B2 rating, but has said that the scale of its liabilities means that it is “weakly positioned” on that point on the scale.
Counterbalancing its debt is the group’s ability to generate cash. Its earnings, before interest, tax, deprecation and amortisation, stand at €1.4 billion a year. After the flotation, it will use some of this to cover the dividends that the holding company and equity investors will receive.
Moody's analyst Martin Chamberlain, argues that a portion of it should go towards tackling Ardagh's €8 billion debt. "The company will generate a lot of cash over the next 12 to 18 months, we would have an expectation that some of that large cash pile would be used to repay debt," he says.
The signs are that Ardagh intends doing just that. It is understood that in a conversation with bondholders ahead of the refinancing, Coulson indicated that, post-flotation, it plans to divert some its earnings into paying down its debts.
However, Chamberlain sounds a note of caution, saying that his organisation feels that “the return of capital to shareholders is evidence of an aggressive financial policy that does not align with our expectations of the company”.
While Coulson stressed to bondholders that Ardagh would begin cutting its debts, he was not ruling out further acquisitions, and is believed to have suggested to bondholders that the flotation would open up another source of funding for this should an opportunity arise.
Nevertheless, if Ardagh does cut its debt substantially, it would look more attractive to the equity markets as time goes on. Sources are already speculating that next year’s New York debut could well lead to something bigger down the road.