Had things worked out differently, RPC Group might today be owned by Promens. Both are fast-growing makers of specialist packaging — RPC’s initials stand for Rigid Plastic Containers.
In late 2007, Promens, which originates from Iceland but was quoted in Norway, took a 3 per cent stake in RPC. The assumption was that a bid would follow, because this was in the middle of the short-lived, doomed Icelandic financial boom.
In the event, the Iceland company was sold to private equity and was being primed for a float in Reykjavik. The company was investing heavily, but its reliance on the eurozone meant that a float might prove difficult.
RPC yesterday announced an agreed bid for Promens that values it at the equivalent of £307 million. This is the fourth purchase by the British company in the past year, and the largest, though the summer’s deal to buy Hong Kong-based ACE was not far behind. About £200 million will come from a deeply discounted, one-for-three rights issue at 320p, the rest from renegotiated borrowing facilities.
Deep discounts in rights issues are not uncommon, but the reaction of RPC’s shares to the prospect of so much cheap equity coming on to the market certainly was. The shares shot up 33p to 580p. The deal looks like an excellent one, then.
Both companies are in similar areas, providing specialist packaging to food and beverages and healthcare. They overlap, which allows a forecast of cost savings from putting the two together and closing unwanted factories of at least €15 million (£12 million) and a one-off cash saving from holding less stock and getting better terms from suppliers of €10 million.
These are niche markets, and a stand-out from RPC’s halfway figures to the end of September was a rise in margins from 9 per cent to 10.3 per cent, a long way from what you would get from commoditised product supplied to supermarkets. The European market is still relatively fragmented, and the two together will be buyers of only 4 per cent to 5 per cent of all the polypropylene, the main raw material, supplied to that market.
The shares sell on 12 times this year’s earnings and look like good value. Buy.
PBT £54.9m, up 33 %
My advice Buy long term
Why Deal is an attractive one, with significant synergies. Markets they both operate in are high margin for the sector and set for further growth
SSP is one of the few floats this year by private equity, involving relatively high debt, that has behaved itself. The shares were floated at 210p, oversubscribed five times and added 10p to 255p on the first set of results that should have contained no surprises.
The company, which has Kate Swann, formerly at WH Smith, as chief executive, operates food outlets such as Upper Crust and Caffè Ritazza at airports and railway stations. At a big site, it might be operating seven or eight different brands. One source of growth is adding new ones where it is under-represented. Another is gaining like-for-like sales through those existing outlets. SSP is relatively under-exposed to markets such as the US and Asia.
The most interesting figure in the results to the end of September is a rise in operating margins from 4.3 per cent to 4.8 per cent. This was achieved by importing the sort of disciplines, such as scheduling labour to cope with peaks and troughs in demand and centralised buying, that are common enough in UK retail, Ms Swann says, but are little known in her new field.
SSP should be able to come in with 3 per cent like-for-like annual sales increases, but the main attraction is the forecast expansion of air travel, up about 6 per cent this year, according to industry figures.
Operating profits, stripped of one-offs, rose by 12.3 per cent to £88.5 million, including exchange rate losses. The shares sell on almost 18 times earnings. This looks a bit rich and suggests no immediate upside. Best avoided for now.
Revenue £1.83bn
Dividend nil
My advice Avoid
Why SSP’s prospects are good but shares are highly rated
This column has championed quoted companies such as Electra Private Equity as a way of allowing the ordinary investor to play the rich man’s game of investing in high-growth private companies and reaping the benefits as the value of their portfolio grows.
Electra might be about to become even more attractive to such investors, because Edward Sherborne, the activist, earlier this year bought a 20 per cent stake and agitated for change. He was rebuffed by other shareholders, but the board initiated a review that will report its conclusions in a few weeks and could mean the payment of a dividend for the first time.
The share price has therefore been reacting to events outside the company’s control, but it added 91p to £26.70 on news that net assets at the end of the financial year to September, at £31.74, well exceeded market expectations.
This was a 15 per cent rise, at the top end of Electra’s target range. The total return, including dividends reinvested, was 25 per cent, after good gains in value in some recent investments. The shares are still on a decent discount to net assets. I would be a buyer, before any uplift from a decision to pay dividends.
£31.74 net assets per share
My advice Buy
Why Forthcoming review could be beneficial
And finally . . .
IP Group operates in the same area as Imperial Innovations and the recently floated Allied Minds, taking intellectual property developed in academia and protecting it by patent while taking it to market. Several of its 88 investments, which include Xeros Technology, another of this year’s floats, and Oxford Nanopore, the unlisted genetic sequencing specialist, have been active of late. One, Modern Biosciences, has signed a deal with a subsidiary of Johnson & Johnson to develop a rheumatoid arthritis treatment.
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