When Paul Coulson entered the glass bottle market a quarter of the century ago, a typical 330ml beer bottle weighted 330g.
His Ardagh Group, which traces its routes back to the now-defunct Irish Glass Bottle Company that was set up in Dublin in 1932, has since spearheaded an industry charge in gradually slimming down containers. The group is now behind the world’s lightest beer bottle, at 155g. And it also leads the “lightweighting” race on standard spirit and wine bottles in efforts to reduce costs and boost its sustainability credentials.
However, elsewhere Coulson has taken a more “supersize me” approach to the business generally.
The Cooler – as he is known to friends – has turned Ardagh Group into one of the world’s largest packaging businesses through a series of deals, including a beverage cans business acquired in 2016 for $3.4 billion (€3.1 billion).
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While Anglo Irish Bank was a first port of call in the early days, acquisitions over the past two decades have been fuelled by high-cost bonds – or what are known in financial markets as junk, or sub-investment grade, debt. Total borrowings currently stand at about $12.5 billion.
All was fine a few years ago when the cost of borrowing was at ultra-low levels and Ardagh could barely make enough bottles and cans to meet demand turbocharged by an explosion in the popularity of energy drinks and manufacturers shifting away from plastic.
The debt pile is looking patently less sustainable these days after interest rates shot up globally and the company’s earnings began to slump in the second half of 2023 amid subdued consumer confidence and as drinks companies cut back orders to run down packaging stockpiles.
While earnings have since picked up in the group’s 75 per cent-owned cans unit – New York-listed Ardagh Metal Packaging (AMP) – the outlook for its legacy glass business continues to deteriorate. On Thursday, Ardagh slashed the full-year earnings before interest, tax, depreciation and amortisation (ebitda) forecast for its bottles segment by as much as 13 per cent to $680 million.
[ Ardagh’s riskiest bonds fall below 20c on euro ahead of resultsOpens in new window ]
This was driven by weaker-than-expected demand among consumers in Europe so far this year. But it also reflects a move by drinks manufacturers from glass to aluminium cans, a cheaper option.
AMP, by contrast, now sees its ebitda coming in between $640 million and $660 million after nudging the lower end of its previous guidance up by $10 million.
The combined outlook means the group is now forecasting, at best, a 3.1 per cent increase in earnings this year to $1.34 billion. That equates to a net debt ratio of almost nine times at its estimated current $11.6 billion in net debt. That’s an unsustainable level of debt in the current rates environment, according to analysts, including Fitch’s Marina Bordakova, who downgraded Ardagh’s credit rating in May to a level that is eight steps deep into junk territory.
For comparison, Colorado-based beer can maker Ball Corp expects that its net debt ratio will be about 2.5 times this year, while US glass containers giant O-I Glass, which appointed Cork native Gordon Hardie as its chief executive in May, forecasts a ratio of a little over 3 after lowering its earnings guidance a few months ago.
Listed US packaging groups are currently trading at levels where their enterprise value, which includes equity and debt, is about 7.5 times Ebitda estimates for this year. On that basis, shareholders in Ardagh Group, led by Coulson, who owns an effective 36 per cent stake in the group, are in negative equity.
[ Ardagh enlists Apollo to refinance $700m debt falling due next yearOpens in new window ]
Ardagh’s AMP is trading on a higher multiple – of about nine times – because it is a pure play in the better-positioned metal cans market. But even applying that to the wider Ardagh Group leaves shareholders with little or no equity value.
Coulson, who remains a key board member after appointing South Africa native Herman Troskie late last year to succeed him as chairman, secured a loan in April from US alternative asset manager Apollo to refinance $700 million of senior bonds that were due to be repaid next year. It removed the immediate financial risk facing the group – even if the interest rate on the new loans, at almost 9 per cent, is much higher than the 5.25 per cent coupon that was attached to the 2025 bonds. The next big repayment date is in 2026.
Ardagh also enlisted Apollo to mop up some of the group’s riskiest bonds – its $1.7 billion of subordinated notes are currently trading between 21 and 26 US cents on the dollar – in the market. It’s a bit of a headscratcher why Ardagh hasn’t yet given Apollo the go-ahead to do this, as buying up the notes would reduce the group’s debt pile significantly.
[ Topping out takes place on first homes at Glass Bottle siteOpens in new window ]
There are other levers Ardagh can pull, such as selling its 42 per cent stake in food cans manufacturer Trivium, which is said to be on the market.
But Troskie admitted on a call with analysts on Thursday that the group doesn’t know what the right capital structure of the company should be, because Ardagh can’t call a bottom in the glass market.
“The unusually explicit evaluation of the sobering new reality for the glass market ratcheted our anxiety levels that a [debt] restructuring is somewhere on the horizon,” said Helen Rodriguez, an analyst with debt research firm CreditSights. “We think a restructuring proposal will come, although the severity of it will be dictated by how the market plays out over the next few quarters.”
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