* Bondholders could charge Ardagh more for relaunched deal
* Sunk costs of postponed VNA deal run above USD100m
* Term loan should offer cheaper funding, however
By Robert Smith
LONDON, Jan 27 (IFR) - Ardagh launched a rejigged debt
package backing its long-stalled acquisition of Verallia North
America (VNA) on Monday which it hopes will wipe the slate clean
with bondholders after it misjudged its previous deal.
Ardagh raised USD1.6bn in high-yield bonds to finance the
acquisition in January 2013, but was forced to return this cash
to bondholders earlier this month after it failed to meet a
crucial deadline with US regulators, burning through the best
part of USD100m in interest costs on ultimately useless bonds.
While the company is now funding USD700m of the new
USD1.53bn deal in the loan market, USD830m will be funded by new
senior bonds with 2019 and 2021 maturities.
"It's been expensive for them and the merits of the
acquisition have now been diluted, but above all management have
lost credibility," said an Ardagh bondholder.
"Ardagh's management are good but they overreached
themselves on this deal."
Ardagh priced the three-tranche bond just days after
announcing its acquisition of glass maker VNA in January 2013,
arranged by sole bookrunner Citigroup, even though the
acquisition still needed the US Federal Trade Commission's (FTC)
The bonds had a deadline of January 13 2014 by which they
had to be returned if the deal had not closed. The FTC first
raised its objections to the deal in July, and still had not
approved the deal by the deadline.
Ardagh, hoping to save face before the January deadline,
launched a consent solicitation to extend the bond's escrow
period by six months. This backfired however when a group of
large bondholders opposed the offer.
"Even if investors don't like a consent, they often take it
on the chin from large issuers as they don't want to be cut off
from new bond deals," said a source involved in opposing the
"In this instance though, Ardagh miscalculated their mood."
As well as reputational costs, the economics of the deal
have changed since last year, potentially giving investors a
stronger bargaining position.
"I would demand higher yields this time," said an investor,
pointing out that Ardagh is selling the six plants earmarked by
the FTC at lower multiples than they agreed to buy them for. He
added that given that other Ardagh bonds are call-contrained,
they cannot be used as a pricing benchmark.
The disposals have certainly diluted the merits of the deal.
Last twelve months Ebitda would have been USD845.3m, but has now
been reduced by USD78.9m to USD766.4m according to the
memorandum. While the original deal pegged synergies at USD70m
over four-years, this figure has now been reduced to USD60m.
The disposals also mean that leverage is higher this time
around, at 5.5x compared to 5.3x. Ardagh is also issuing off the
back of a weaker fourth-quarter figures, with the memorandum
explaining that group Ebitda is expected to be 10% lower
The costs of the stalled deal have also been significant.
The USD1.6bn of bonds have a weighted averaged cost of 6%,
meaning that they accrue around USD95m in interest a year. On
top of this, Ardagh paid investors a USD16m premium to return
the bonds early. The fees and expenses for the deal have since
climbed, from USD74m estimated in the 2013 bond's memorandum to
a whopping USD119m estimated in the new memorandum.
Ardagh minimised some of the interest costs through a shrewd
deal with VNA's seller St Gobain. St Gobain agreed that Ardagh
would receive a portion of VNA's cashflow even before the deal
was approved, according to sources with knowledge of the matter,
allowing it to largely cover interest costs.
"They've still eaten costs in the economics of the deal,"
said the bondholder, however.
"This is just how they've funded it; it's still the best
part of USD100m in wasted equity value."
Despite the weakened metrics, a second investor pointed out
that US high-yield market has tightened generically by about
80bps since Ardagh last accessed the market. The first investor
agreed that Ardagh could be saved by the high-yield bull market.
"Ardagh are lucky that they're in a market where
yield-hungry investors might bite their lip and buy the bonds no
matter what. In a disciplined market, if management lost
credibility in this way it would definitely pay up."
The fact that Ardagh is no longer fully beholden to bond
investors will also help the company, as the new Term Loan B
will be cheaper than the senior secured bonds according to the
"When Ardagh raised the acquisition debt the first time it
had not accessed the loan market before, and did not want to do
so as a debut issuer on a large acquisition," said the banker.
"By raising the term loan in December, however, Ardagh is
known in the market and has something that trades out there."