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Strategies & Market Trends : Value Investing

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From: Walter Bagehot9/6/2010 6:48:53 PM
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Pactiv

I couldn't see if anyone else had written about this:

I know Graeme Hart (Rank Group / Pactiv / Reynolds) is a self-taught financial engineer, and I know also that he has come close to bankruptcy through highly-levered deals in the past, but I was looking at Pactiv to try to work out what he saw in the business aside from combining with Reynolds, and whether there was anything we could learn from him in it. He had bought dirt cheap businesses in the past, but is he anything more than playing the multiples and chopping costs to the bone?

- PE is around 17.8 today post-announcement - not too high
- MCap is around $4.28bn, which is just a little higher than book (though note the amount of goodwill is around $1.1bn!)
- $1.2bn debt - mainly long-term (ignoring Hart's financing package)
- Working capital of $550m, which with low creditors is a sign of customer power...
- EV/EBITDA is somewhat high at around 12.0 if you like those measures (I don't...but his bankers will have been)
- Free cashflow - Declining $350-$150-$30 in the past three years (pre financing)
- Debt in the deal - $4.5bn, which I assume would be at something like US LIBOR + 5 to 9% for the leverage, which works out at - say - $300m a year interest before repayments, which he can probably easily cover with synergies.

Sure, synergies may help, and sure, it will be a great deal if it works, but I see no margin of safety and nothing that makes me think the business is that undervalued...other than a game of playing the multiples, and awaiting the business to return to a "normal" multiple post-recession.

All in, nothing to learn from the financial engineers of this world.

A big bet on there being no double dip, which will probably work out making his equity contribution a very, very good return.

But not a smidgen of value investing there!
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