Ardagh: Through the Looking Glass

EXECUTIVE SUMMARY

• We present the first of a multi-part series on Ardagh Group S.A. (ARGID B3/B/B-) and Ardagh Metal Beverage Packaging Co (AMPBEV, B2/B/B) to help investors better understand the group.
• To understand Ardagh’s value today, it is necessary to consider its genesis as a debt-funded acquisition vehicle and serial consolidator, and the impact that has on the quality of its assets and its operating efficiency.
• Ardagh is the collective product of the consolidation phase that the global glass and metal packaging sector underwent between 2010 and the present day, particularly following the GFC-induced downturn in the sector. During this phase, players built up scale and rotated assets in order to rationalise their holdings in different packaging segments.
• Ardagh was a willing participant in this sectoral asset rotation phase until leverage served as the brake on the proposed acquisition of Verallia’s European business in 2015. Ardagh had quadrupled the size of its business in the previous four years.
• The high level of capex, exceptionals and ongoing restructuring that continue to divert cash from deleveraging reflects the M&A that built Ardagh, and the pressing need to integrate and optimize the various parts of the group. Ardagh is heavily FCF negative, yet underperformance in FY23 should pave the way for improvement in FY24. Ardagh ’s European glass business, while the best performer by business segment, is lower margin than its better invested, lower levered peers with the US glass business dragging on overall results. Ardagh ’s metal business has margins significantly weaker than glass, yet stronger than its metal peers.
• Management indicated it expects 2024 volumes to show significant improvement as customers (consumer packaged goods players) lower end-market pricing to spark demand. As such, Consolidated EBITDA is expected to improve to approximately $1.4 bn, which would leave FY24 year-end net leverage at the Group level at 6.8x. Assuming consolidated cash interest payments of approximately $484 mn in FY24, FCF defined as EBITDA less capex and interest, is estimated to be $350 mn.
• While there is a negative perception about Mr Coulson stepping back from the group, we think it may be an opportunity to re-engineer the business away from its historic function as an M&A vehicle, and towards a more conventional operationally-focused player with greater cashflow discipline.
• That said, while we expect Ardagh will be able to revert to more stable operational KPIs in 2H24 as cost inputs normalise, the levers it has to alleviate the pressure on its credit quality necessarily include M&A and corporate finance solutions.
• We will consider the levers it has at its disposal and debt capacity options in subsequent notes in this series.

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