Chris Gibson on the pros and cons of a $650 million deal.
Rigid plastic packaging ... if that hasn't got you excited and wondering where to invest, take a look at your milk, juice and yoghurt containers at breakfast. At lunch, note your takeaway's packaging and, tonight, take a look at the tray under your fresh meat.
Finally, imagine the industrial-scale equivalents supplying a range of industries throughout the nation. Raphael Geminder's Pact Group has an approximate 40 per cent share of this market in Australia and New Zealand, with a foothold in Asia.
Pact Group is in the process of a float, raising $649 million through the offer of 170.7 million shares at $3.80 apiece. Geminder Holdings' interest in Pact Group will remain substantial at about 40 per cent after listing.
For the deal: Pact Group is a family business with a decade of delivering strong growth and cash flows couched in a long-term mindset, a key differentiator in an IPO market brimming with private-equity exits (think Myer). It has incorporated 34 acquisitions since 2002 and lifted earnings before interest, tax, depreciation and amortisation (EBITDA) from $31 million to a forecast $202 million in fiscal 2014.
Against the deal: Pact Group is a family business with a decade of private cross-holdings and supply agreements between family controlled operations. In the public market these are known as "related party" transactions. These tend to make fund managers uncomfortable; it is not easy to know just how long of an arm was used in determining fair value.
The offer: Eyes have watered as investors have read that $564.9 million cash from the $649 million proceeds raised are to be paid as settlement of a promissory note issued by Pact Group and held by Geminder Holdings.
Part of the proceeds will be used to fund acquisitions. Geminder Holdings and other related parties of Pact Group have interests in four businesses to be acquired, valued at a combined $84.9 million. A further $24 million a year will be paid to related parties of Geminder Holdings nominated as preferred suppliers to Pact Group.
Separately, Geminder Holdings will repay $127.6 million it owes to Pact Group and has paid $255 million to Pact Group to acquire shares in the business before the public offer.
The offer implies an enterprise value (market capitalisation plus net debt) to forecast 2014 EBITDA multiple of 8.5x and a share price to earnings per share multiple of 13.4x.
Amcor, a far larger packaging peer, already has a strong Asian presence and global operations. Amcor is trading on a fiscal 2014 enterprise value to EBITDA ratio of 9.1x using consensus forecasts. On a price to forecast fiscal 2014 earnings per share (P/E) basis, Amcor is trading at 16.2x.
Pact Group's pro forma balance sheet shows net debt of $603 million, equating to a net debt to shareholder equity ratio of 289 per cent post-listing, or three times its forecast fiscal 2014 EBITDA of $202 million. Management argues its strong cash generation allows added leverage. Amcor's net debt is forecast at 90 per cent of shareholder equity in fiscal 2014 and two times EBITDA.
So Pact is not cheap and there are more related parties than the royal families of Europe. However, it does have a history of generating strong operating cash flows and is forecasting an annualised dividend yield of 5 per cent at the listing price. Pact is targeting 65 per cent franking on its 2014 final dividend.
Whether there is longer-term value for new investors will hinge on Pact's ability to meaningfully grow its international operations. A falling Australian dollar will help input costs and earnings translation.