New R&R bond expected for Australian acquisition

Fri May 30, 2014 7:22am EDT

* New ice cream bond expected after Peters deal

* Acquisition well flagged to investors

* Questions remain over payment-in-kind note

By Robert Smith

LONDON, May 30 (IFR) - Bankers and investors are anticipating a new high-yield bond from R&R Ice Cream in the near future, to back its recent acquisition of Australia's Peters Ice Cream.

While there is no public information on a potential bond deal yet, market rumour is rife and bankers are already speculating on the potential structures the deal could use.

"I'd say that it's safe to assume a sponsor would have committed financing in place, and R&R's last bond clearly left room for more acquisition debt," said a banker close to the deal.

Credit Suisse and Barclays have backed every R&R debt deal since the firm was taken over by private equity firm PAI last year, and are widely expected to have underwritten the trade.

The UK ice cream business announced earlier this month that it is acquiring Australia's Peters Food Group from Pacific Equity Partners.

"R&R are evaluating financing alternatives, which may include accessing the capital markets," said Andrew Honnor at Greenbrook Communications, which represents PAI.

R&R has issued bonds in both sterling and euros, and has a payment-in-kind (PIK) note as well as more vanilla debt. Earlier this month it raised its debut sterling bond, a six-year senior secured note carrying a 5.5% coupon.

Provisions in that bond left plenty of room for future acquisitions, tipping off many investors that a deal was imminent.

"This was no surprise, as at the roadshow they made it pretty clear there was an acquisition in the pipeline," said a high-yield investor

"It was hard for me to get involved in that bond knowing they were on the cusp of making another acquisition and would have to issue debt again."

R&R has made a number of acquisitions in recent years, notably buying Fredericks Dairies last year. That acquisition and the purchase of Eskigel in 2012 boosted R&R's Ebitda from 92m to 107m last year.

SMOOTHING SEASONALITY

Several bankers said the new acquisition was an excellent fit for R&R, as the different timing of Australia's summer would smooth out the seasonality of the European firm's revenues.

The investor was more sceptical of these claims, however.

"A decent acquisition is one that boosts your return on capital, not one that smoothes out your earnings," said an investor.

"Financial analysts are not so stupid that they are phased by seasonality. The bottom line is that unlike their previous acquisitions, there will be no synergies as it's in Australia."

The investor said the seasonality angle might be something that would help bolster the company's appeal in a future IPO.

"Bankers might be pushing a line that equity investors will like, ahead of time," he said.

Several R&R bondholders said last month that the company is considering a listing, although this may have been wishful thinking on their part as a spokesman for the company quickly dismissed this as inaccurate speculation.

PIK OF THE POPS

Holders of R&R's PIK debt looking for an exit would especially welcome an IPO, as it remains an open question as to how the company will refinance the deeply subordinated paper.

PAI raised the 253m PIK toggle last year when it acquired the business from Oaktree Capital. The note has a high 9.25% coupon, but while the first and last payments have to be in cash, the rest of the coupons can instead be paid with more debt.

This option has not yet been used, according to R&R's 2013 year-end accounts, with the notes paying a EUR12.5m cash coupon in November, but the coupon steps up to an even steeper 10% if it is.

Investors say it is unclear whether R&R will replace the instrument with more debt or with equity. The existence of a vendor note tied to the PIK also complicates the situation, according to one investor.

Vendor notes are a form of debt that sellers provide to buyers, usually to sweeten a deal. In this case, Oaktree provided such a note when it sold the business to PAI last year. The vendor note is £50m in size, according to the investor.

"My understanding is that they have to repay the vendor note to refinance the PIK," said the investor.

"If the new Australian acquisition bond meant they maxed out their senior secured leverage, then this could mean they have to issue an even larger PIK to repay both notes." (Reporting by Robert Smith; editing by Alex Chambers, Julian Baker)