Brexit, what Brexit? US private equity firm secures RPC in US$4.3 billion deal

24 Jan 2019 --- US private equity firm Apollo has struck a US$4.3 billion deal to acquire UK plastic packaging giant RPC. The sale was agreed just hours before the expiry of the regulatory deadline, which had previously been extended five times since negotiations began in September 2018. Notably, the buy-out has come amid continuing Brexit uncertainty and increasing public and regulatory scrutiny of plastics and their role in a more sustainable future.

According to The Wall Street Journal, bankers have been warning that Brexit market volatility is making big deals difficult to finance and sale prices hard to agree on.

Moreover, UK packaging experts have been predicting that the nation’s plastic industry will be particularly hard hit by Brexit, especially in the event of an increasingly likely “no deal” scenario. Plastics are one of the UK’s top ten imports and exports, with continued strong market growth over the past decade.

According to the British Plastics Federation, 69 percent of all British trade in plastics is completed within the EU. It estimates that failure to secure a trade deal with the EU would see a dramatic £540 million (US$694 million) increase to the cost of imports and a £340 million (US$437 million) increase to the cost of exports.

“The supply chain and sourcing of packaging materials will be hit hard in the event of a ‘no-deal’ Brexit,” UK packaging expert, Neil Famer, tells PackagingInsights. “This is across the board and could affect all imported plastics and polymers. Products for FMCG, particularly food markets including chilled and fresh products, are most at risk.”

Apollo’s pending acquisition of RPC proves that multi-billion deals can be still be reached amid Brexit uncertainty. The deal also suggests that there are still major players eager to invest in the future of the pan-European plastics market.

One of Europe's largest plastic packaging producers
RPC is one of Europe’s largest producers of plastic packaging, specializing in bottle caps, asthma inhalers and paint pots. It has operations in continental Europe and the US, but the UK remains its largest market.

“The [Apollo] offer recognizes the quality of RPC’s businesses and the strength of their future prospects,” notes James Pike, Chairman of RPC. Pike was one of several board members who recommended the bid.

“In July, I stated that differing investor views on the appropriate level of gearing were constraining the group’s ability to pursue opportunities for growth and, as such, putting pressure on RPC’s valuation,” Pike says.

“I also said that the Board was working to resolve this situation. [The Apollo] announcement is the culmination of that process. The Board believes that the offer of £7.82 per share is a good outcome for shareholders and intends to recommend unanimously that they accept this offer,” he adds.

Nicholas Mockett, Head of Packaging M&A, Moorgate Capital, confirms that RPC and Apollo discussions are at an advanced stage with due diligence complete.

“It is not all that surprising to see another UK PLC disappear from the public market in this manner. RPC had fallen out of favor with the financial community due to its high profile M&A program. At the same time, media hysteria was rife against plastic,” he notes.

“Meanwhile, Private Equity funds have about US$2 trillion of dry powder to deploy and they are particularly interested in opportunities which are not at peak value and which can support LBO levels of debt. Apollo, which has recently raised a fund in excess of US$24 billion have prior experience in the packaging industry, particularly with Berry, which has many parallels with RPC,” Mockett explains.

Anti-plastic sentiment has hit the mainstream, epitomized by far-reaching bans on single-use plastic items. In December 2018, the European Parliament and the Council of the EU reached a provisional agreement to ban 10 types of single-use plastic items under the EU’s Plastics Strategy.

Global plastic packaging market continues growth
Despite the rise of paper-based and bio-based alternatives to traditional plastics, the global plastic packaging market is still expected to rise. The rigid plastic packaging market will reach US$166.63 billion by 2022, growing at a CAGR of 5.2 percent between 2017 and 2022, according to new Frost & Sullivan forecasts. Significantly, one of the biggest obstacles to growth in the rigid plastic market is growth in flexible plastic alternatives.

“The rigid plastic market is fragmented and there is no particular player that holds a dominant share,” Prateeksha Kaul, Research Analyst, Visionary Science at Frost & Sullivan, tells PackagingInsights. “This means that market players resort to various developmental strategies such as geographical expansion, product launches and collaborations to expand their presence.”

Within the fragmented rigid plastics market, Kaul strongly recommends players to consider mergers and acquisitions. This will help companies gain an extra share in the market by expanding either their customer base and/or product portfolio, or by allowing them to gain market entry.

“For instance, in 2016 Amcor acquired Sonoco which helped the former expand its production capacity. In 2018, Alpla Holding GmbH acquired Greek packaging supplier Argo SA to bolster its pharmaceutical business,” she says.

Similar to Apollo, Amcor and Bemis are also backing the future of the global plastics market amid growing sustainability concerns with a huge US$6.8 billion merger. The deal is expected to close in the first quarter of 2019.

Sustainability is a key driver in the global packaging industry and one which cannot be ignored amid growing consumer concern about the environmental effects of unrecycled plastics. A recent US study into the environmental effects of plastics concluded that, in comparison to alternative material choices, plastics have the best net environmental performance.

Apollo’s US$4.3 billion acquisition of RPC indicates that major financial players are willing to bet on the future growth of the global plastic market, fueled by the development of a global circular plastic economy. The move also suggests that investments in major UK packaging suppliers are not off the table amid the Brexit uncertainty.

By Joshua Poole

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