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RPC Group - 500m pound North American acquisition

Equity research team | 9 February 2017 | A A A
RPC Group - 500m pound North American acquisition

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RPC has announced the £511m acquisition of Letica, a leading North American manufacturer and distributor of rigid plastic packaging and foodservice products.

The deal is funded by a fully underwritten 1 for 4 rights issue at 665p.The theoretical new price of every share, based on the closing price before the deal was announced, is 980p. The shares fell 5.6% to 1,000p per share following the announcement, broadly reflecting the terms of the rights issue.

The deal was accompanied by a brief third quarter update. Quarterly profits are ahead of management expectations, with integration of the group's GCS and BPI acquisitions delivering synergies in line with expectations.

Our View

RPC is one of Europe's leading manufacturers of rigid plastic packaging - think yoghurt pots, shampoo bottles etc. Glamorous it isn't, but the group has been able to increase its dividend every year since 1995, though there are of course no guarantees this impressive record will be maintained.

Its strategy of targeting higher-margin, more resilient consumer goods packaging has helped it grow margins from 4.6% in 2009 to 10% in 2016. That's despite economic turmoil in its core European markets, where it would be well-placed to benefit from any turnaround.

The plastic packaging industry is fragmented, with RPC commanding just 6% of the European market. The group has sought to grow by snapping up smaller competitors to supplement its steady organic growth, and has recently started to make acquisitions outside its European home market.

Letica is the group' first major foray into North America, and the acquisition multiple is above what RPC has paid for other businesses. However, management have a good record of taking costs out of acquired businesses, not least through increased polymer (raw plastic) buying power (an option which should be available here despite the lack of geographical overlap). It's worth bearing in mind though that all acquisitions come with risks, especially when they're large and outside a company's normal comfort zone.

Away from M&A, the group has benefited from the growing popularity of plastic packaging. Compared to alternatives such as metal and glass, it offers cost and weight savings as well as design flexibility. Design matters to RPC, with the group priding itself on offering complex solutions for clients (and charging a premium in return).

The shares have enjoyed a strong run of late, and currently trade on a price to earnings (PE) ratio of 15.1 times expected earnings, with a prospective yield of 2.4%.

Letica acquisition and third quarter trading update

Letica has 13 manufacturing facilities in North America with approximately 1.7m sq.ft. of manufacturing and warehouse space. The deal is expected to more than double RPC's North American revenues and polymer purchases.

RPC believe that the acquisition will deliver more than $5m per annum in ongoing cost synergies, with a further $12m of incremental cost savings identified within Letica. The deal is expected to enhance earnings per share in the first full year financial year post completion.

The Letica acquisition consists of an initial payment of £391m and subsequent payments of up to £120m, subject to Letica hitting earnings targets in the first two years after the deal completes. The upfront cost represents an acquisition multiple of 8.5 times Letica's 2016 EBITDA, but falls to 6.4 times if the full targets are met.

The rights issue to fund the deal is fully underwritten and will raise approximately £540m after expenses, with surplus funds being used to repay debt.

The author holds shares in RPC Group.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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