Announcement of the offering
Late last week on November 27th, the Pact Group, a prominent privately held Australian packaging manufacturing company, filed a prospectus with the Australian Securities and Investments Commission (ASIC) for an initial public of its common shares, to be distributed in Australia and New Zealand.
The Melbourne based Pact Group is hoping to raise about US$584 million (A$649 million) gross, and about US$560 million (A$622.3 million) net of fees and expenses of the offering.
The company expects to be able to begin marketing the shares later on during this current week, on Thursday, when the prospectus becomes “live”, and if it is successful the shares would then commence trading on the Australian Stock Exchange on December 17th.
The Pact Group was founded in 2002 by private entrepreneur Raphael Geminder, and is currently controlled by him through his private company Geminder Holdings. It has built up a very large business through a combination of organic growth and by making a series of 34 acquisitions, in the period since.
The company’s business is primarily the conversion of plastic resin and steel into rigid plastic and metal containers for packaging and related products. The company has customers in the food, dairy, beverage, personal care, other household consumables, chemicals, agricultural, industrial and other sectors.
As part of a simultaneous corporate reorganization associated with the offering, there will be a number of inter-corporate transactions with related Geminder controlled entities, in both directions. The net result will be that as much as US$299 million (A$332.1 million) of the total moneys to be raised by the offering are expected to actually end up going to Geminder Holdings and its affiliates.
This would then leave about US$261 million (A$290.2 million) from the offering available as net new money flowing into the treasury of the company. These remaining funds will then be used to reduce the Pact Group’s own indebtedness to external third parties – this number is precisely identified for this purpose in the projections contained in the prospectus (see Table 4.11 therein).
Background to the Pratt family’s business interests
The family background to the announcement of the issue is well worth some description too, as, if it proceeds, this will be a major event for the Australian business community, given the local celebrity of the parties involved.
Recently Australian financial publication Business Review Weekly listed the combined personal fortune of the Pratt family, taken as a group, to be about US$5.9 billion (A$6.5 billion). As the family’s various members share certain core holdings, do their own thing with others but share few details about any of them with the outside world, BRW has not so far tried to separate their wealth; with this new public offering though it is now considering trying.
The family patriarch Richard Pratt
We start with Richard Pratt, who died in 2009 at the relatively young age of 75 and who was one of Australia’s most prominent industrialists. He was the Chairman of the, privately held, packaging industry conglomerate Visy Industries, which had been founded by his own father.
Pratt was born in Poland but his family emigrated from Poland to Australia in 1938 to escape from the Nazis, changing their surname from Przecicki once they arrived.
After initially working for his father as a salesman at Visy Industries, Richard eventually took charge of the company and built Visy to become a huge packaging empire, dominating many segments of the business in Australia and with large factories in the United States as well, where it trades today as Pratt Industries.
Richard Pratt’s substantial philanthropic endeavours were undertaken through a family foundation, the Pratt Foundation and these efforts have continued after his death under the guidance of his three children.
Like many Australian entrepreneurs, particularly those who came from very recent immigrant stock, his business and personal activities were undertaken with great discretion, and as far from the glare of publicity as possible.
Both before, and since, his death his children have grown into, operated and continued to develop the family’s businesses based on the core provided by the family holding company Visy Industries. Visy itself concentrates on manufacturing packaging products made from the recycling of paper, and also has its own Kraft paper mills, mostly in Australia. Today they are each believed to hold a one third interest in Visy.
The new generation has also expanded and grown the scope of the company’s original operations considerably over the last few years, including during some difficult economic conditions, by making acquisitions on sometimes favourable terms, perhaps taking advantage of better deal-terms available in tough times.
We do not know, of course, all the precise ins and outs of the way in which the family’s holdings are today structured, as these are not disclosed, but one can try to draw at least some logical inferences based on their areas of operations and, as well, reported differing personal styles.
Richard’s son Anthony Pratt is today Visy’s Executive Chairman, but he also runs, and according to BRW today controls, the US arm of the business. Called Pratt Industries it has its own very large re-cycled corrugated paper and cardboard box manufacturing business, with factories all across the United States. Today Pratt Industries re-cycles over 3, 000 tons of paper every single working day in the United States.
Richard’s son-in law Rapahel Geminder, who is married to his daughter Fiona, has created and aggressively built up his own vehicle the Pact Group by numerous local packaging industry acquisitions since 2002, deploying substantial leverage to do so along the way.
Today Pact has become a very large player in the plastic and steel consumer container segments of the packagng business, with a 40% market share in certain product lines in Australia, New Zealand and on the fringes, so far, of Asia as well.
To get started in 2002, Geminder likely obtained access to some of the family holding company’s, i.e. Visy Industries’, own original domestic container industry assets and some cash to help him get started.
In any case he since succeeded in building the Pact Group once he did get going, with it now being a large packaging conglomerate in its own right. Asia is very much the next target market for rapid growth for the Pact Group as well, it seems, according to the new prospectus.
Richard’s other son in law Alex Waislitz, who is married to his daughter Heloise, has built a flourishing and highly successful private equity investment business of his own, Thorney Holdings, and likely with an initial stake from the family coffers as well when he first got started.
In doing all of this, the new generation of Pratts have at the same time all tried to continue to maintain the tradition of privacy concerning their own lives, and keep to a minimum publicity related to their business activities as well.
As you get bigger, and the more of an impact you make, the harder this obviously becomes, and when the day comes to finally take part of the empire public it becomes impossible, particularly when as individual family members you may all have started to go your own way a little bit as well.
Public financial disclosure requirements then compel you to lay out quite a lot of detailed information about your business activities, at least relating to the part you are taking public.
This is what is happening now, and a veil has been lifted on part of the family’s Australian interests with the proposed IPO of the Pact Group.
Structure of the Pact Group offering
In the United States, one frequently finds that a corporate reorganization either takes place, or is unconditionally committed to, immediately prior to an IPO. This is done in order to simplify the structure of the company and to make the job of explaining it subsequently to the public easier. Then when an offering does takes place, the prospectus for it, for the most part, only has to talk about the immediate impact of such a proposed offering.
Here there have clearly been lots of private company hoops to go through as well on the structuring side. However, because they are all said to be conditional on the success of the offering itself, many of them have now been laid out, with a great deal of detail, in the offering prospectus. This leads to full disclosure, but it certainly doesn’t make such a document any easier to read or understand.
The biggest take away at the bottom line, though, is that of the total money expected to be raised, US$ 299 million (A$322.1) million) is effectively going back to the family via Geminder Holdings and its affiliates, and only US$261 million (A$290.2 million), or less than half, is going into the treasury of Pact Group itself which will then be used to pay down some of its substantial third party external debt.
This certainly may raise one or two eyebrows with institutional money managers, but is unlikely to be a deal breaker given the overall high regard the company seems to be held in, as of course are its sponsors, and the current robustness the overall IPO market seems to be enjoying in Australia.
In return for the money to be raised, 58.04% of the company is being offered to investors, with the Geminder family keeping about 40%. Also in the deal’s favour, there are no complicated classes of stock – everybody gets the same class of stock with each share having just 1 vote per share. So Raphael Geminder is asserting he is content to live, and be judged in the future, by results.
The Offer itself is an initial public offering of 170.7 million Shares in Pact Group Holdings Ltd. The Shares being offered represent 58.04% of the total number of 294.1 million shares in the Company which will be outstanding on listing if it is successfully completed.
At the expected price contained in the prospectus of about US$ 3.42 per share (A$3.80 per share) the offer would, if completed, raise gross proceeds of US$ 584 million (A$ 649 million). Investment managers of the offering are Crédit Suisse and, Australia headquartered, international investment company McQuarie Capital.
Impact on the Pact Group’s financial position
Successful completion of the IPO on the terms outlined above, would imply a total market capitalization for the equity of the company of just over US$1 billion (A$1.1 billion) immediately upon listing.
The recorded book equity in the balance sheet, though, on a pro forma basis will be a good deal less, at only about US$ 188 million (A$ 208.5 million).
Pro forma total net third party external debt on the consolidated balance sheet of the Pact Group, after completion of the offering, would still be about US$ 542.5 million (A$ 602.7 Million). This nevertheless represents a significant reduction of about one third in its total debt, after using the company’s own share of the proceeds of the offering to pay down debt levels.
With combined pro forma EBITDA (an acronym for earnings before deducting interest, depreciation and taxes) of about US$180 million (A$ 202 million), on pro forma revenues of about US$1.1 billion (A$1.2 billion), for the year to June 30th, 2014, the company should at least be able to start out life as a public entity with a substantial cash-flow cushion to service its interest costs on that debt.
On the other hand though, Pact Group will still face a debt maturity profile even after the issue which will have some relatively short maturities, and these will have to be dealt with at some point.
Having tried to go public three years ago in 2010, and to alternatively engage in some kind of private equity transaction in 2012, only to abort the process both times Raphael Geminder now looks to be on course to pull it off on this occasion. Assuming he does succeed we can then only congratulate him for a job well done.