Gores Holdings V: The Acquisition Of Ardagh's Beverage Can Business Looks Intriguing

Summary

• Gores Holdings V will acquire the beverage can division of Ardagh Group.
• A boring business, but with great growth prospects.
• I have started to build a position based on the fundamentals and the outlook.
• Looking for more investing ideas like this one? Get them exclusively at European Small-Cap Ideas. Get started today »

Introduction

I don’t play the SPAC game, but earlier today, I initiated a position in Gores Holdings V (GRSV) which announced its transaction last week. It will be acquiring the beverage can business from the Ardagh Group (ARD) which will retain an 80% stake in the company. As I have been looking to increase my exposure to the beverage can sector and the price for the Ardagh division is quite reasonable, I have started building a position.

Data by YCharts

The screenshots of the presentation were taken from the SEC filings, and I apologize for the poor quality.

Explaining the deal

GRSV announced its deal last week and its share price actually moved down on the news, before recovering a little bit of the lost ground the next day. While the acquisition isn’t related to any "flavor of the month" type of deal which sent other SPACs soaring when they announced the umpteenth deal in the EV industry, I actually think there’s fundamental value to be unlocked for Gores Holdings V shareholders which have a 2-3 year time horizon.

GRSV is acquiring the beverage can business of the Ardagh Group, and the Ardagh Metal Packaging target will be acquired for a total consideration of $8.2B. This includes about 485 million shares of the SPAC that will be issued to the Ardagh Group (with a deemed value of $4.8B) while Gores Holdings V also will make a $3.4B cash payment. Ardagh Metal Packaging is a consistent top-3 player in the world in all three of its core areas with Ball Corporation (BLL) and Crown Holdings (CCK) as main competitors.

Source: SEC filings

The structure of the deal is quite straightforward. To satisfy the $3.4B cash payment, Gores Holdings will issue an additional 60M shares at $10 and use the $525M cash on hand. Additionally, the SPAC was anticipating to raise $2.315B by issuing debt. Upon completion of the deal, there would be 607M shares outstanding and the company will have about $2.3B in net debt and $2.45B in debt and leases.

Source: SEC filings

The debt funding has already been secured

The cash funding for the payment already has been secured. Whereas the SPAC was looking to raise $2.315B, the demand for its green bonds was so high the offering was upsized and Ardagh Metal Packaging will now have more financial flexibility while the total interest expenses will come in lower than the $125M per year I had anticipated. The company raised 950M EUR and $1.65B in a combination of 2028 and 2029 senior notes:

Source: Press release

At the current exchange rate, this equals a total of $2.8B in debt which means the company will have approximately $500M in cash on hand when all the dust has settled. The additional cash now means there will be zero equity needed to complete the expansion plans (see later).

Using the average weighted cost of debt, the annual interest expenses will be approximately 24M EUR and $61.5M. At the current EUR/USD exchange rate of 1.22, the total interest expense will be approximately $91M. Roughly $35M lower than I had anticipated while raising more cash.

Where to go from here? Looking at the 2024 projections

Gores is acquiring Ardagh Metal Packaging at 15 times the 2020 EBITDA multiple which sounds outrageous. However, the valuation is quite reasonable as AMP is currently working on a massive expansion plan which should result in continuously increasing EBITDAs and EBITDA margins until 2024.

Source: SEC filings

As you can see, the 2021 EBITDA is estimated to be $654M, but will really start to accelerate from 2022 onwards. The EBITDA multiple based on the 2022 EBITDA projections is just 10.5 while the multiple is less than 8X the projected 2024 EBITDA. So while the transaction seems expensive based on a historical perspective and performance, investors need to look toward the future as AMP will boost its can output by about 55%.

Source: SEC filings

Thanks to the strong relationships with customers (some have been working with Ardagh for over three decades), 98% of the 2021 capacity and 96% of the 2022 capacity has already been contracted, so I have very little doubt Ardagh Metal Packaging will be able to meet its 2022 EBITDA estimates.

Source: SEC filings

This allows us to have a look at Ardagh Metal Packaging with the 2024 EBITDA target of $1.1B in mind. The sustaining capex according to the SEC filings was $100M per year, and knowing its competitors Ball and Crown Holdings have a depreciation rate of approximately 250% of the sustaining capex (building new plants has a huge sunk cost which is being depreciated over time, but relatively low maintenance capex), the FY 2020 depreciation expenses were likely around $250M.

Assuming a production expansion by 55%, I’ll be conservative and estimate the maintenance capex to increase by 65% to $165M. Meanwhile, the depreciation expenses will remain relatively linear, and I’m budgeting $380M in depreciation in 2024.

This allows us to run the numbers. An anticipated $1.1B EBITDA minus $375M Depreciation and Amortization Expenses minus $95M interest expenses (rounded up) equals a pre-tax income of $630. Assuming an average corporate tax rate of 28%, the net income will be around $454M, or around 80 cents per share.

That’s not impressive, but the interesting part of Ardagh Metal Packaging will be the difference between depreciation expenses ($375M) and maintenance capex ($165M). This means the free cash flow result (on a sustaining basis) will be approximately $210M higher than the net income. This would represent $674M or approximately $1.1/share. And that is why I think this deal is attractive for the SPAC. Using assumptions based on data available from competitors, I anticipate the FY 2024 free cash flow result to exceed a dollar per share.

Of course, Ardagh needs to complete its growth investments first, and it estimates it will need approximately 1.8B to do so. In the acquisition filings, Gores Holdings mentioned no new equity will be needed to fund the growth capex, and that appears to be correct. The FY 2020 free cash flow result of the cans division of the Ardagh Group was likely around $300M, while the average growth rate in the next few years will be around 17% (this is conservative, Ardagh Metal Packaging is aiming for a 19.8% EBITDA CAGR the next four years), this means the sustaining free cash flow will likely be around $345M in 2021 (conservative), $400M in 2022, and $475M in 2023.

This will bring in about $1.2B. And as the company issued $2.8B of debt rather than the $2.32B it needed to pay the Ardagh Group, the remaining $500M in debt raised last week will be sufficient to cover the funding shortfall. Gores Holdings V’s claim that no additional equity will have to be issued seems to be correct.

Investment thesis

And that’s why I have started acquiring a position in Gores Holdings V. The acquisition target isn’t a "cool new shiny thing" but a robust business in a sector where a supply shortage will continue all the way until 2025 (competitor Ball is estimating the world will require 100B additional cans per year by 2025), and this is just a robust and boring business I like to invest in.

Valuing the company is a bit trickier. Ball is currently trading at 13X its anticipated 2023 EBITDA. Applying the same ratio to the anticipated 2023 EBITDA of $996M as per the Gores Holdings V SEC filings would result in an enterprise value of around $13B. Minus the $2.8B in net debt would result in a fair value of $10.2B for the equity which, divided over 607M shares, equals $16.80/share. There’s one caveat: The Ardagh Group will be entitled to a total of 60 million bonus shares tied to the share price performance of Ardagh Metal Packaging.

Source: SEC filings

That’s fine with me as the target share prices are pretty much in line with fair values.

I have started buying the Gores Holdings V shares (not the units), and I will continue to do so as I want to immediately have a full position.

Analyst’s Disclosure: I am/we are long GRSV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[jakedavis]

Better to buy GRSV or GRSVU?

[The Investment Doctor]

@jakedavis I'm not quite sure, I am just writing put options on GRSV these days to get the premium, even if they expire OTM.

[bazooooka]

Not a bad one to just get some warrants near a buck and let this one play out for a few years.

[hard head]

Thanks- a very good story in high growth sold out market....I think this is the kind of business that gets rerated to 15x= 24 bucks

[Paregoric98]

Some excellent analysis here and in this elevated market, I can't picture a better risk-adjusted return situation. One thing to add that improves the assessment still further. In the Citi conference call, the company said that "maintenance capex would be around $100 million in the early years and rises a bit above that in the later years...". So guessing the capex will be well short of the $165 million figure you've assessed for '24, so even more free cash flow. Incidentally, it was further mentioned that "dividends is one use of that, but there will also be further growth capex as well I'm sure. We have conversations going on at the moment with customers". I'll personally surmise this will be a key to Ardagh Metal Packaging retaining a high multiple of a growing EBITDA for years to come.

[The Investment Doctor]

@Paregoric98

Hi Pare, yes I didn't want to be overly optimistic, I am fairly confident sustaining capex will be less than $150M per year as there will be more synergies (on the capex front) as more plants open up.

I think the current fully-funded growth plan to 2024 and GRSV now trading at just 8X the 2024 EBITDA while competitors are trading at 12-14X their 2024 EBITDA should pave the way for a relatively easy 50-100% capital gains in the next 2-2.5 years. I think this is the second SPAC (after LOAK/DNMR) I find the valuation reasonable. I did sell out of DNMR below $30 as the valuation was getting inflated, so I missed the run there. And that's fine, because I invest based on fundamentals.

[Paregoric98]

@The Investment Doctor All well put and to add another lever at work here that helps explain the forecast ramp in EBITDA even beyond the large capacity additions is the focus on specialty cans, where margins run 1.5x to 2x that of traditional cans. Ardagh's portfolio is currently around 43% specialty and expects to be at 60% by 2024. Given the level of expertise inherent in establishing these lines, this focus in addition to margin improvement, also provides something of a moat vs. any new entrants into the marketplace aside from the other current well-capitalized players, BLL and CCK. Which have their own expansion plans that fit into projected demand, yet as you mention are trading at higher valuations

[broken.arrow]

the constant overhang from the 5% tranches of extra shares issued to Ardagh (that vest at higher prices over time) waters down returns a bit, but agree in general

[tgordo49]

Excellent analysis, thank you! Holding my SPAC shares rather than flipping, as there's a place in my portfolio for this business long-term.

[knoxmarlow]

Definitely an interesting idea. BLL and CCK are in a solid oligopoly business.

[The Investment Doctor]

@knoxmarlow Indeed! And all three oligopolists will have enough demand to cater to with the anticipated demand increase of 100 billion cans per year in 2025.

I recently reviewed CCK as well. Perhaps that would be of interest: seekingalpha.com/...

[knoxmarlow]

@The Investment Doctor thanks for highlighting CCK. One of my bigger positions and I ignore it between reports. But I need to check in and see what they are doing with the packaging business after the "strategic review."

[knoxmarlow]

@The Investment Doctor CCK had a killer Q1. And they sold European Food; I didn't catch the multiple, but the Board must have been happy with $2.7 billion (minus $100 million in tax expense).

Have you heard anything about the SPAC approval process? I own a small position in GRSV; but I'm not sure if I purchased in time to vote. I'm looking to add to the position. I couldn't find any investor relations documents; unlike my experience with other SPACs that I have owned.

Also, seems like ARD should be reporting next week. I wonder how ARD compares to GRSV from a valuation perspective; it is monetizing 20% of the business at a solid valuation and retaining 80% of the business. But perhaps not 40, 50, 60% upside like the SPAC.