The Irish glass bottle manufacture Ardagh is to buy a British company four times its size in a heavily-leveraged deal. It will make the combined company the fifth-largest glass company in Europe and the biggest in the UK and Ireland, with combined sales of close on £250 million.
Ardagh has a stock market capitalisation of €56 million (£44 million) but is still paying £240 million sterling (£283 million) for Rockware. The deal involves just £38 million sterling in equity, with £114 million of senior debt and £70 million sterling insubordinated debt. A further £25 million sterling of the consideration is deferred.
Ardagh's chairman, Mr Paul Coulson, who took over at the group a year ago when his Yeoman group bought a sizeable stake in Ardagh, said that the leveraged nature of the transaction would not put the merged group under financial pressure. He added that the deal had been structured to allow Ardagh to become involved in other mergers and acquisitions in the rapidly-consolidating European glass industry "very quickly". Rockware is one of the biggest glass manufacturers in the UK, with a 31 per cent share of the local market. The group had sales in 1998 of £166.4 million and pretax profits - excluding exceptionals - of £22.8 million sterling. The price tag indicates a multiple of 9.4 times Rockware's after-tax profits of £25.5 million sterling.
Rockware operates from four locations in the UK and last year produced 2.2 billion glass bottles for the food, beer, spirits, soft drinks, wines/cider and dairy industries. Its customers include household names such as SmithKline Beecham, Scottish Courage, Anheusder Busch, UDV, Hillsdown, Nestle, Whitbread and Coca Cola. Over the past five years Rockware has invested £160 million sterling in its British operations which currently produces 600,000 tonnes of product.
In contrast, Ardagh has around 79 per cent of the Irish glass bottle market, with production of 125,000 tonnes, 347 million bottles and operates from a single site in Ringsend. While Ardagh's main business is relatively short-run niche products for around 70 customers in Ireland, Rockware's main expertise in higher volume large run products. The combined group will aim to capitalise on both the consolidation in the glass bottle industry and also within the drinks industry, where companies are increasingly sourcing their glass bottle requirements from the larger manufacturers to the exclusion of smaller manufacturers.
"When I took over as chairman last year, it became clear that Ardagh would either have to sell out to a larger manufacturer or become bigger itself. Then Owens Illinois was forced by the EU to sell Rockware and we were given the opportunity," said Mr Coulson.
Mr Coulson said that, while the enlarged Ardagh would begin its life with a debt/equity ratio of 300 per cent, interest charges will be covered by 2.5 times by operating profits, and more if Ardagh exercises an option to roll-up interest payments on the senior debt. "We have left ourselves plenty of room to manouevre," he stated, adding that glass companies worldwide, such as Rockware's vendors, Owens Illinois, have traditionally operated highly-geared.
The £38 million sterling equity part of the consideration comes from Ardagh's own cash pile - estimated at £24 million at June 1998 - as well as the proceeds of a £10 million underwritten open offer to shareholders and bank borrowings. The £114 million sterling senior debt from WestLB extends over seven years, while the £70 million sterling subordinated debt comes from Owens Illinois itself and extends over seven years, with an interest rate of 8 per cent until 2003 and 10 per cent thereafter.
The presence of Owens Illinois as a 21 per cent shareholder in Ardagh complicated the acquisition, as technically it became a reverse takeover and, as a result, Ardagh shares have been suspended pending completion of the deal. After completion, Owens Illinois's 21 per cent stake in Ardagh will be bought in and cancelled.
This will mean that, after the open offer, the number of Ardagh shares in issue will rise by little more than one million to 36.4 million.
Mercury Asset Management owns 28.7 per cent of Ardagh and its stake would rise to almost 36 per cent when the open offer and Rockware shareholdings are excluded. But Mercury has decided not take up its allocation of new shares under the open offer. Instead, Mercury has arranged for some of its clients to acquire its allocation of two million shares.
