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RPC - Takeover deadline extended

Nicholas Hyett | 8 October 2018 | A A A
RPC - Takeover deadline extended

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RPC Group plc Ordinary 5p Shares

Sell: 794.80 | Buy: 795.00 | Change 0.40 (0.05%)
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Talks with private equity investors Bain Capital and Apollo Global Management have not yet resulted in a bid for RPC. However, the deadline for a possible bid has been extended to 5 November 2018, as talks with both groups are ongoing.

The announcement was made after market close on 8 October, when shares had been trading down 4%. It was accompanied by a trading statement that showed organic sales rising around 3% in the half.

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Our view

Plastic packaging manufacturer RPC has been under pressure to prove its long-running acquisition programme is creating value for shareholders, and not just masking a lacklustre operating performance. Management have put a hold on acquisitions while it deals with those concerns.

So far, we think the results are good. Organic growth is healthy and exceptional integration costs, the focus of much of investor discontent, are falling. From an operating perspective the company looks healthy, and the group looks set to maintain its 25-year track record of dividend growth, at least for now.

Unfortunately the share price hasn't reflected the improvement. That's attracted the attention of two private equity giants. We haven't got a formal offer, and with the deadline being pushed back another month it sounds as if one is still some way off. It's entirely possible that a bid won't ever be forthcoming, since RPC is facing new pressures. This time from regulation.

Following the airing of 'Blue Planet', the UK government has faced calls to tighten up rules on plastic waste. The EU has followed suit, and is already increasing controls.

RPC argues it's well placed to weather the political turbulence, and could even benefit.

The group is Europe's leading recycler of polyethylene film and the majority of its products are recyclable. Its focus on innovation should mean it can respond quickly to demands for more easily recyclable products. Its innovation centres are actively researching renewable polymers and compostable materials that break down completely when treated correctly at the end of their life.

We think RPC's scale and focus on innovation are significant advantages. Plastics are a key weapon in fighting other environmental concerns like carbon emissions and food waste, and RPC is well-placed to benefit from consolidation within the sector as well as increased demand.

A bigger problem in our view is the effect of the headwinds on RPC's ability to make new acquisitions. A subdued share price - the shares trade on a price to earnings ratio of 10.3, well below their longer-term average - means using its own shares to fund future deals is expensive, while investors seem uncomfortable about debt levels. If the group can't buy smaller rivals investors are left with just an unexceptional organic growth rate.

That's not a concern for private equity groups like Bain and Apollo though - who have cash to spare and could fund a buying spree if they see opportunity beyond the short term headwinds.

For now investors are being offered a prospective yield of 3.7%, but until the Bain/Apollo situation wraps itself up, things are a little on hold.

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Trading details

First half sales hit £1.9bn, ahead of the same period last year.

Margins and operating profits are in line with management's expectations - although increased polymer prices have proven a headwind in the half.

RPC has completed the disposal of the Letica Foodservice business, and completed the acquisition of recycling specialist PLASgran in August.

Full results for the first half will be published on the 28 November.

Find out more about RPC shares including how to invest

The author holds shares in RPC.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.