The shareholders of the diminutive glass bottle manufacturer, Ardagh, will be asked to make their most important business decision on Wednesday. The Ardagh directors are urging them to agree to the reverse take-over of British glass company Rockware, four times its size, for £240 million sterling (€358.21 million).
The shareholders should turn to page 64 of the offer document. That contains the pro form statement of combined net assets; it shows that Ardagh's net assets of £51.6 million will rise to only £61.2 million following the amalgamation of the two companies. The minute rise in net assets reflects the highly leveraged nature of the deal, with a debt-equity ratio of 300 per cent. It is clearly a high-risk strategy.
But then the architect of the deal, chairman Mr Paul Coulson, whose company, Yeoman, has an 8 per cent stake in Ardagh, is no stranger to high risks. A £93 million acquisition designed to catapult his asset finance company, Yeoman, into the publicly quoted area went decidedly sour.
Yeoman's acquisition of CLF Holdings led to an £18 million write-off. Within months of its share listing, the share price collapsed. In February 1992, the company announced a loss of £137 million after extraordinary charges, giving it the dubious distinction then of recording the largest loss by an Irish publicly quoted company.
Nevertheless, he displayed tenacity by pursuing an action against his adviser on the deal, merchant bank SG Warburg. He won an out-of-court settlement of £35 million against the bank and added a further £4.5 million from an action against two CLF directors. The risks associated with the take-over of Rockware arise only because equity accounts for only £38 million sterling of the funding. And most of this, around £24 million, comes from Ardagh's own cash, representing 70p per share. The rest comes from the proceeds of a £10 million underwritten open offer and borrowings by Ardagh.
The remainder of the consideration is made up of £114 million sterling in senior debt, £70 million sterling in subordinated debt, and deferred payment of £25 million. The debt, however, is well structured, with some roll-up facilities giving it leeway but it is expensive. The senior debt consists of a seven-year facility of £105 million and a revolving credit of £17 million. The interest rate will be LIBOR plus 200 to 225 basis points, and is secured on the assets of Rockware. With LIBOR more than two percentage points above EURIBOR, this is expensive but Ardagh can probably justify it as these liabilities are matched with British assets.
The subordinated debt is not secured but it carries a coupon of 8 per cent per annum up to 2003 and 10 per cent thereafter. In an era of low interest rates that is expensive but the coupon reflects the risk element. However, the high gearing has the advantage that the number of Ardagh shares in issue will rise by just over one million to 36.4 million. So if the strategy works, the proportionate gains to Ardagh shareholders should be substantial. Indeed, in year one, the deal should lead to a doubling of Ardagh's earnings, based on historic figures, proving that financial engineering does work, at least initially.
Ardagh on its own would have been confined to the domestic market, which has become more competitive with Mr Sean Quinn's new plant creating more capacity. Following the acquisition of Rockware, the group will be the leading glass packaging manufacturer in the UK, with a 31 per cent share, and in Ireland with 79 per cent.
As both Ardagh and Rockware have had their own rationalisation programmes, the scope for further benefits from rationalisation must be limited. So the enlarged group would have to look elsewhere, such as mainland Europe, if it is to perform better than the industry. But it has clipped its own wings, for a few years, with the very high gearing.
However, the enlarged group should have little difficulty in servicing the debt. The interest payments are covered three times by available earnings. Also, dividend payments should not be affected; indeed, there should be scope for growth.
Shareholders should vote in favour of the deal on Wednesday. They should also take up their entitlement under the open offer of 10 new shares at 120p per share (152 cents) for every existing 33 ordinary shares. Ardagh's shares closed at 220 cents on Friday, 20 cents down on the previous day, following profit-taking.
