Bondholders add to Ardagh's VNA acquisition woes

Wed Oct 23, 2013 1:06pm EDT

* Bondholders push back on Ardagh bond repayment request

* More clarity on buyer for glass units needed

* Sweetened offer for consent solicitation could be on cards

By Natalie Harrison

NEW YORK, Oct 23 (IFR) - Ardagh's battle to acquire Verallia North America (VNA) has hit another setback after investors declined to let the Irish packager postpone a mandatory redemption of the bonds backing the deal.

Ardagh launched a consent solicitation on October 10, asking bondholders for an extra six months to close the acquisition of VNA from France's Saint-Gobain, which US regulators are trying to block.

However, two sources said the company did not get the majority approval needed by the October 18 deadline, meaning it will have repay the three bonds, totaling USD1.6 billion-equivalent, if the acquisition does not close by January 13.

The proposed amendment, in return for a fee, would have extended the deadline to July 13, 2014 and given the company more time to satisfy anti-trust authorities who are concerned that the company will have too much dominance in the US$5 billion US market for glass containers.

The VNA deal would give Ardagh and industry leader Owens-Illinois over 75% of the US market for beer and liquor bottles between them. However, it is seen as a vital step in Ardagh's plans to deleverage via an initial public offering.

"Ardagh does not generate much free cash flow, so any organic deleveraging would be very slow," said CreditSights analyst Rahul Gandhi.

"The only effective option, therefore, would be to do an IPO and use those proceeds to pay down debt." He said net leverage was 5.9 times Ebitda pro forma for the VNA acquisition.

To appease regulators, Ardagh offered to sell four US plants in September.

"The fact that the company is willing to sell these plants shows you how much they want this VNA acquisition," said Gandhi.

The offer did not satisfy regulators, who said they did not have enough time to undertake due diligence before a hearing on the merger that is expected to begin in December.

"Ardagh has said that it will find a single buyer for the assets it will spin off, but has given no indication of who this buyer is," said Gandhi.

"If it is forced to sell them at a low valuation, that is not good from a credit standpoint."

TIGHT CORNER

Bondholders were offered a US$10 fee for each US$1,000 principal amount of the dollar notes, and EUR10 for each EUR1,000 principal of the euro note.

One investor who owns the Ardagh bonds said that was not compelling enough, considering that the bonds have underperformed since their launch in January - partly due to a sell-off in low coupon bonds on expectations that interest rates will move higher.

"The general view of bondholders was: why not just get paid out at 101 in January if the VNA deal does not go through?" said the investor.

If Ardagh does not get the green light by January 13, it will have to repay the senior secured 5% EUR250m 2022s and 4.875% USD420m 2022s in full, as well as USD700m of 7% USD850m 2020 senior notes, at 101 plus accrued and unpaid interest.

The euro bonds are currently bid at 98.5, but were as low as 96 at the start of the month, the investor said. The 4.875% and 7% dollar bonds are bid at 98.5 and 99.5 respectively.

Bondholders are in a powerful position. If they refuse to get on board, Ardagh will have to repay the bonds and launch new debt to finance the acquisition deal - assuming that it does eventually go ahead.

Gandhi said that it would make sense for Ardagh to offer a higher fee to bondholders to extend the deadline, rather than run the risk of having to pay higher coupons on new bonds that would have to be raised.

"Where the bonds are trading suggests to me that the market expects Ardagh to come back with a sweetened offer," said the investor.

Ardagh and Citi, which is acting as the consent solicitation agent, declined to comment.

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