Description

Summary: 

GRSV, a SPAC sponsored by The Gores Group, has agreed to invest in a carve out of the beverage can assets of Ardagh (called AMP, which stands for Ardagh Metal Packaging).

Thesis: 

-          AMP is in the early phases of an aggressive expansion program backed by long term contracts that will nearly double EBITDA over the next four years.  This earnings growth is mispriced. 

-          The beverage can market is attractive.  It benefits from secular growth, tight supply, and a consolidated industry structure. 

-          Relative valuation gap with BLL is unreasonably wide and will close over time. 

-          The recent SPAC washout has not discriminated.  This is a great deal backed by a high-quality sponsor. 

Background:

-          Ardagh is a global producer of glass bottles and aluminum cans based in Ireland.  The assets comprising AMP were acquired by Ardagh in 2016 from the required divestitures brought about by the merger between Ball and Rexam.  These assets (23 can plants) are now fully integrated. 

-          Ardagh has been undergoing a strategic review in recent years to clean up its capital structure, deleverage, and unlock value.  The company merged its food can business with a competitor in late 2019 and with this transaction it is taking public the remainder of its metal packaging assets.  Ardagh will now be a glass producer with holdings in two separate can entities. 

-          The Gores Group is a private equity firm that is a frequent sponsor of SPACs.  This is SPAC V.  SPAC I acquired Hostess in 2016, SPAC II acquired Verra Mobility (EZ Pass) in 2018, SPAC III acquired PAE (gov services) in 2019, SPAC IV acquired UWN (mortgage co.) in 2021. 

Transaction details: 

-          GRSV sold 52.5mm shares at $10 per + 1/5 warrant with strike at $11.50.

-          PIPE committed for 60mm shares.

-          $2.8b of debt raised to fund cash dividend to parent.

-          Ardagh will own ~80% of the new company plus an earnout (depending on stock price).

-          Parent has a 6-month lockup on issuing new shares.

-          Deal expected to close in July.  We await a merger proxy and shareholder vote. 

Attractive industry fundamentals:

The beverage can industry is attractive for several reasons. 

1)      Consolidated industry structure: 

Rational competitive dynamics have led to favorable contract terms for producers.  Aluminum is a pure pass through.  Contracts also protect against other input cost inflation (freight, labor, energy, etc). 

2)      Secular growth (4-6% unit growth annually):

-          Gaining share from plastic for environmental reasons.

o   high collection rates.

o   high sorting yields.

o   high remelting yields.

o   high recycled content. 

o   75% of aluminum ever produced is still in use.

-          Gaining share from glass for a number of reasons.

o   Cheaper to produce.

o   Easier to ship (lighter, does not break).

o   Better shelf life (blocks UV light).

-          Gaining share from returnable glass (emerging markets).

o   Better hygiene.

o   Easier logistically.

o   AmBev is in the process of switching from returnable glass to cans in Brazil.

-          Increasing acceptance of craft beer in cans.

-          Proliferation of new brands (seltzer, hard seltzer, energy drinks, etc.).

o   These brands increasingly choose cans for packaging needs (75% in 2020).

3)      Defensive:

Can demand is resilient through economic cycles.

4)      Tight supply, accelerating demand:

North America is currently short ~10b cans.  Ball has discussed turning away business because “we don’t have cans.”  Europe and Brazil are tight as well (AMP is completely sold out globally through ‘22).

“Even with all the capacity announced, I think we're still a couple of years away end of '23, at least into '24 before we think the North American market is in balance if we even catch up to be in balance by then”

-          CCK investor day 5/27/21

“Simply put, we're really looking at what's being imported in from like unnatural lengths of miles, if you will.  We're shipping cans in from Korea, from Central America, from Brazil, from Saudi Arabia. We know they're coming in from China. We know they're coming in from Africa.”

-          BLL at BOA conference on 3/4/21

De-risked, high-return, organic reinvestment opportunity: 

AMP is investing $1.8b (incl. $200mm pre-close) to expand in each of its operating regions (U.S., Brazil, Europe).  80% of this spend is on specialty capacity which carries a contribution margin 1.5x-2.0x higher than a typical 12 oz can.  Importantly, the new capacity is backed by long-term (3-7 yr) commercial contracts.  Most of the projects are expansions at existing facilities.  Management’s financial projections imply an incremental pre-tax ROIC in the low-to-mid-20s. 

Compelling relative value:

AMP compares favorably to Ball (higher beverage can exposure, soon-to-be-higher specialty mix, faster growth) yet trades at a significant discount.  Instead, AMP trades like CCK (which I also think is too cheap) which has a much lower specialty can mix, a non beverage can business in NA that is slower growth and more competitive, and a lower multiple industrial packaging business.  The valuation gap gets wider in ’24 since AMP earnings are growing faster. 

Valuation:

Here is the track record of EBITDA projections from previous Gores SPACs from the initial deal presentation.  This lends some credibility to management’s estimates for AMP. 

Management’s base case expects EBITDA of 1,117 in FY’24.  This forecast is based on customer commitments.  Ball trades at 15.1x NTM EBITDA.  Therefore, I think it is reasonable to expect that AMP could fetch a multiple of 12.5-14.5x.  

Rather than post my model, here is the output (expected share price) at YE ‘23 at various EBITDA and exit multiples.  It accounts for all dilution from earnout shares and warrants (net of proceeds).  This analysis conservatively assumes that cumulative FCF builds up on the balance sheet.

Therefore, in ~2.5 years I expect AMP will be trading 75-100% higher than the current trading price. 

DCF output:

Liquidity:

GRSV currently trades $5.8mm of volume a day.  The float will more than double when the deal closes since the PIPE accounts for another 60mm shares.  The float will increase further if Ardagh reduces its AMP holdings post lockup (note:  Ardagh does not intend to reduce stake below 50%).

Key Risks:

-          Supply/Demand imbalance post-2024: 

o   If the industry adds too much supply (or demand falls short), the competitive environment could deteriorate.  So far things look like the industry will go from very tight to more in balance.  This is something to monitor since all three major players are adding significant capacity.  See appendix for specific projects.

o  This risk is somewhat mitigated by a good starting point (tight market), secular demand growth, good contract coverage, and a consolidated market structure.  In addition, none of the companies are building speculative capacity.            

-       Execution risk:

o   AMP is undergoing a massive expansion.  Projects could be delayed and/or come in over budget. 

-          Deal does not close:

o   Historic redemptions for Gores SPACs have been minimal.  $10 trust value protects downside.  PIPE is committed.  Debt financing is complete.  AMP is already an unrestricted sub (as of April). 

Conclusion: 

While many SPACs deserve to be punished, GRSV is the classic baby thrown out with the bathwater.  This is a high-quality set of assets in an attractive industry.  Earnings are growing rapidly.  Sponsor dilution is minimal ~2%.  Incentives remain aligned (80% still owned by parent). 

Once the AMP deal closes and the sell side initiates coverage, I expect traditional fundamental investors to value GRSV like a pure play beverage can company (a scarce asset) rather than a messy, off-the-radar SPAC.

Appendix:

-          Warrant dilution is calculated net of cash received.  Includes SPAC warrants and sponsor warrants.

-          Earnout is paid to parent company (Ardagh).

Opportunity for CSD switching in Europe:

BLL & CCK have been compounders:  Why not AMP?

BLL has consistently generated economic profit upon reinvestment:

More proof of economic resiliency:

Capacity announcements in AMP markets:

*since this chart Can-Pack recently announced a facility in the U.S. and CCK announced a new line in Mexico

Catalyst

de-spac in ~1 month

sell side initiates coverage 

earnings growth materializes