Quick Pitch: Pact Group (PGH:AX)
Potential Higher Offer – TBD Upside
This idea was shared by Edward.
A low risk bet on expected higher takeover offer. Pact Group is a packaging manufacturer (plastic containers, bottles, rigid packaging, etc.) focused on the Asia-Pacific region. Last week, the company received a takeover proposal from its controlling shareholder, founder and chairman Raphael Geminder (owns 50%) at A$0.68/share. The offer is structured as an unconditional off-market bid, similar to a tender offer in U.S. There is no minimum participation condition, but the buyer is aiming to reach 90% ownership, which would allow to squeeze out the remaining shareholders, or at least 75% ownership, which if some other conditions are met would allow to delist the company. Special committee is currently reviewing the proposal. The shares are trading at a 4% premium to the bid, reflecting markets expectations of an improved offer.
The A$0.68/share bid came at zero premium to pre-announcement prices and seems a bit opportunistic, made close to all-time low share price levels at the time when the business is a bit in a turnaround. Over the last two years PGH shares have been decimated (down over 70%) amid a perfect storm of inflationary pressures (e.g. increasing resin prices), softening customer demand and higher finance costs due to rising interest rates and high leverage (4.0x net debt-to-EBITDA). In FY23 the operational performance slowdown was exacerbated by slower than expected demand recovery in China as well as adverse/extreme weather events in the core markets of Australia and New Zealand (such as tornadoes, floods, heatwaves and tropical cyclones) that have impacted supply chains (due to damaged infrastructure) and the agricultural end-market demand. Driven by these factors, PGH’s underlying net profit after taxes declined from A$94m in FY21 to A$70m in FY22 and A$45m in FY23. On top of that, last year PGH had higher capital expenditures (A$130m in FY23 vs. A$78m-A$90m in FY21-FY22) to expand its recycling capacity. This led to material reduction in FCF and eventual elimination of dividends. However, there are several reasons to believe that operational performance has bottomed out. Most of the input costs are stabilizing and the company anticipates margin boost from higher share of recycled content (12% currently vs. a target of 30% by FY25). Capital expenditures are projected to revert back to previous levels (A$85m guided for FY24) as recycling-related projects are nearing completion. Higher resulting FCF might be used to reduce leverage and/or reinstitute the dividend. PGH is expected to provide FY24 guidance during the AGM in November. It is plausible that Geminder is well-informed about the outlook and is making the acquisition offer ahead of any potential positive announcements. If that is the case, he should also be willing to up the offer price.
Peer valuation comparison suggests there’s a bit of room left for a price bump. PGH is currently trades at 4.9x TTM EBITDA vs ORA:AX at 7.5x TTM adj. EBITDA and the US/European peer BERY at 8.1x. Some of the discount is admittedly explained by the fact that these peers are many times larger and less levered.
Australian billionaire Raphael Geminder is a very credible buyer and is an expert in the packaging industry. He founded PGH in 2002 and has stayed behind the wheel since. Geminder has also co-founded one of Australia’s largest recycling companies Visy Recycling and owns a controlling stake in packaging products/equipment distributor Pro-Pac Packaging (PPG:AX, 66% stake).
The key risk: Geminder might simply be seeking to opportunistically increase his stake in the company rather than reach the 75% or 90% ownership thresholds. This would make any offer bump much less likely. The current takeover bid takes an uncommon form as an off-market offer and does not include any minimum participation conditions. PGH’s founder had previously issued unconditional on-market takeover bids (meaning a large bid is simply placed on the market for anyone to fill) for the discount retailer The Reject Shop in 2018 and the health/beauty product supplier McPherson’s in 2021. Both offers were made at opportunistic times as the shares of these companies had plummeted in the preceding months due to worsening operational performance. After facing rejection from both management teams, Geminder did not raise his offers and instead retained minority stakes in McPherson’s (5%, acquired through the on-market offer) and The Reject Shop (19%, acquired before issuing the bid). The current situation with PGH differs from Geminder’s previous bids by a couple of important aspects: (1) Geminder already holds a controlling stake in Pact Group, and (2) PGH operates in the packaging/recycling industry, where he appears to have much more expertise/investments than in retailing and consumer/health product manufacturing.
Back to AUD $0.68, anything worth updating here?
Since the initial write-up, PGH management has rejected the offer. Meanwhile, Geminder has extended the expiration date of the tender from November 8 to December 4 without increasing the price. Less than 1% stockholders have tendered so far, which isn’t surprising given that the share price has been trading mostly above the offer price. The bid is clearly doomed to fail and the main uncertainty remains whether Geminder is genuinely interested in taking the company private or not.
The management rebuffed the current bid citing similar reasons as outlined in the write-up (i.e., the offer is opportunistic, comes at no premium, and values PGH at a historically low EV/EBITDA multiple). The financial advisor put a fair value target of A$1.06-$1.51/share, which would value the operating business at 5.9x-6.5x FY23 EBITDA (versus the current 4.2x), aligning with comparable transactions in the packaging industry.
In turn, Geminder has stated that it already controls PGH, meaning that the control premium is “purely hypothetical,” while arguing that the independent valuation is based on overly optimistic earnings outlook.
One curious aspect is that during the recent AGM, 29% of PGH’s equity holders voted against the remuneration report. If more than 25% of equity holders vote against the remuneration report next year (“second strike”), the vote on management reshuffle could be initiated. I’m not exactly sure how to read this recent voting in the current context (tender offer, management’s offer rejection and Geminder’s controlling stake + 2 board seats).
PGH shares continue to trade slightly above Geminder’s bid levels.
I think the potential downside remains limited and is 4% to pre-announcement levels, although Geminder argues it would be larger noting the additional 4% market drop. PGH reported Q1’FY24 (ending in September) results that continued the recent trend, with revenues/EBIT in line with Q1’FY23. Management highlighted that Q1’FY24 performance did not yet reflect any material benefits from its transformation initiatives, including $20m in run-rate cost savings (as of September) that will only be fully reflected in FY25. The full-year EBIT for FY24 is expected to be in line with consensus.
Geminder increased its bid for PGH.AX with a new offer coming in 20% above the initial one. Currently, the stock is trading exactly at the offer of A$0.84 per share, and it seems like a done deal. The bid has been declared the best and final. Moreover, the offer has already been accepted by both the board of directors and Pact’s largest minority shareholder, Investors Mutual Limited (owns c. 6.5%).
Edward, thanks for sharing this idea – worked out great.
My December’s comment that PGH.AX privatization will be completed at the improved offer of $A0.84/share might turn out to be incorrect. Although Geminder has accumulated an 85% stake in the company (as of January 3) it seems that getting 90% required for a squeeze-out might prove difficult. To drive further tender participation, Geminder has improved payment terms for tendering shareholders, offering payment within 5 business days. Meanwhile, PGH shares have jumped over the past week and are currently trading 7% above the offer levels, reflecting the market’s expectations of another price bump. The current offer expires on February 12.