Shares in plastics packaging group RPC (RPC) are taking another beating as investors bet against the success of ongoing buyout talks.

The company has been in play since early September when it confirmed behind-the-scenes talks with private equity firms Bain Capital and Apollo.

After getting an extension to the original deadline to either put up or shut up under takeover rules – until today at 5pm – Bain has decided to walk away.

Negotiations are still ongoing with Apollo and RPC has again convinced takeover authorities to allow those talks to continue through to 5pm on 21 December. That marks the third extension of a deadline.

TAKEOVER PREMIUM WIPED OUT

But shares in the £2.8bn FTSE 250 business have fallen almost 4% today to 690.4p, leaving the stock barely above their 686p level before the takeover talks were first confirmed.

RPC was always an odd private equity buyout target. Typically, PE firms target companies with robust balance sheets and obvious turnaround potential, particularly through acquisition.

Yet RPC has been very active on the buyout front itself in recent years leading to criticism over its perceived lack of organic growth.

Half year results to 30 September, announced on 28 November, showed revenue up 7%, yet organic sales grew by just 3.2%. That led pre-tax profit to drop 5% in the period, to £154.4m, with the company blaming higher net finance costs stemming from increased net debt.

HEFTY BORROWINGS

Net debt has increased by £41.4m since March 2018 to stand at £1.18bn at the end of the half year period.

That is arguably the biggest hurdle facing the success of striking a buyout with Apollo.

Half year adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) came in at £299.3m, less than half way towards full year forecasts for roughly £613m.

Even if it hits that target, it would imply net debt of around two-times EBITDA at the year end, leaving limited balance sheet headroom for a PE investor to leverage.

That there has been recent activity from short sellers in the RPC stock is another potential worry for investors. Newspaper speculation has claimed that investor Perring has taken an undisclosed short position in the firm.

Data provided by the FCA shows 5% of RPC stock is currently on loan, and in the hands of short sellers.

Increasingly stringent regulation around single-use plastics also pose RPC considerable challenges in future.


Issue Date: 03 Dec 2018