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How is Pact Group navigating the challenges of a takeover bid and minority shareholder opposition?

Updated: Apr 13

Pact Group


Global population is predicted to reach 9 billion by 2030. We’re current using the resources of 1.7 Earths, much faster than our planet’s biocapacity can regenerate.


Our ability to reuse our resources is becoming more important.


That's why today we’re going to examine an Australian company whose focus is on Reducing, Reusing, and Recycling. It’s one that has had a turbulent history post-Covid (both financially and strategically), and while it’s not the only business contributing to a circular Australian economy, it is one of our largest in this space – so it’s worth checking out.


Introducing: Pact Group.


The Coat-hanger business

Pact Group is often referred to in Australian media as the “coat-hanger business”.


This seems a bit unfair: the business was formed in 2002 as a result of a Management Buyout of several underperforming assets from Visy Industries, organised by Raphael Geminder.


In 2018 Pact acquired TIC Retail, which manufactured coat-hangers and retail security tags. Because there’s nothing more fun than simplifying things, Pact became a coat-hanger company!


Nowadays Pact Group has an expanded purpose: reducing waste through reusing and recycling resources. It’s divisions are all focused on increasing sustainability in supply chains:


Pact Packaging

Design and manufacture of packaging based on a whole-of-product lifecycle approach, leaning heavily on recycled material. Market segments:


  • Dairy & Beverage

  • Processed Food

  • Health & Personal Care

  •  Fresh Food

  • Household & Industrial

  • Closures (think child-safe and medicine packages)

  • Bulk packaging (transport & logistics)


 

Pact Reuse

This division focuses on removing single-use items from supply chains. This is basically providing items and related solutions for collection, sorting, cleaning and redistribution. Think of all the places you go that now provide reusable items instead of single-use, eg hospital & hospitality trays/cutlery, schools, shops, and more. Segments include:


  • Supply Chain solutions (designing and selling the processes needed to track, move and hold reusable items)

  • Environmental solutions (waste-related)

  • Infrastructure solutions (infrastructure around reusing items)

  • Retail Accessories (THIS is where the coat-hangers went to!)


 

Pact Recycling

Standard plastic recycling:


  • rPET (recycled polyethylene terephthalate, for packaging such as food containers and plastic bottles)

  • rHDPE (recycled High Density Polythene, relatively hard and impact/chemical resistant plastic, used in shopping bags, food containers, tanks, cutting boards, and pipes)

  • rPP (recycled polypropylene, turned into yarns, fabrics and finished products)

  • rLDPE (used for manufacturing containers, squeeze bottles, tubing, plastic parts for computer components, caps/closures and more)


 

But wait, there’s more

Pact also runs a contract manufacturing business, which definitely does not fit into its glossy circular economy brand positioning. This division is a fantastic client of the 3 circular economy divisions, but at the moment it’s a big fat albatross around Pact’s neck. Let’s see why:


During Covid those contract manufacturing facilities were somewhat of a gold mine, as Pact shifted to produce hand sanitiser. By FY22 contract manufacturing demand had dropped off as all divisions were hit by a combination of higher freight costs and material costs (price of resin used in plastic bottles and containers increased dramatically due to factory output issues through Covid plus transport prices).


The contract manufacturing division alone made a $4m loss, and was targeted for restructure and future sale. The company flagged write-downs & impairments of $68m in relation to the contract manufacturing division. (this does not include $17.8m of unsellable hand sanitiser inventory that was already written off in FY22).


Pact Group’s profits fell by 86% year on year, causing is share price to drop below its $3.80 issue price when it listed on the ASX in 2013.



Pact Group FY21 & FY22 profit

Source: Financial Review, data Pact Group

 

Buying back the farm

Australia has a rich (pun intended) history of founders cashing out when selling their businesses then buying them back at cents on the dollar, after they fail. From Kerry Packer’s $1b sale and $250m buyback 3 years later, to Zoe Foster’s BWX sale for $89m and buyback for $22m after voluntary administration.


Raphael Geminder is currently trying to takeover Pact Group, but his attempt has been a bit of a mess:


  • Geminder started mid-September 2023 when he owned 50% of Pact Group, offering 68c per share when market price was between 70-74c per share, banking on the horrible FY22 results keeping prices low.

  • As you do, the company’s independent directors commissioned a valuation in order to assess Geminder’s offer. The valuation came back at between 83c and $1.24 per share … unsurprisingly the offer was rejected.



man with arms crossed signalling no deal

Offer rejected: no deal



  • In December 2023 he raised his price to 84c per share – that’s 1c more than the minimum independent valuation so should be fine, right? In the meantime net profit fell from $70m to $45m and its final dividend was reduced … to zero.

  • Roll forward to this week, and Geminder cannot get beyond 85.63% shareholding. The share price is remaining roughly stable at 84c.



Attempted Pact Group Takeover

Why are shareholders not taking Geminder’s offer? This is where it gets really fun: sharemarkets are not perfect. They rely on human behaviour which is sometimes not rational. 


Remember TIC Retail? It was started by the coat-hanger guys, David Harris and Mark Gandur. They have a long-running legal dispute with Pact about their earnout payment – Pact says TIC underperformed and refuse to pay the earnout, the coat-hanger guys disagree.


While we need to wait until July 2024 to see the result of the legal case, Harris and Gandur are not waiting. They have increased their own stake in Pact Group to 5% which, by itself, is not enough to block Geminder but a number of smaller retail shareholders seem to be following their lead.


Geminders offer has already extended the due date for their bid a few times and the latest deadline is set for 12 February, just 3 days before Pact Group’s half year financial results are released.

 

Would Pact perform better as a private company?

Pact Group’s half-year results should be interesting. The Group has made a number of operational changes and cost reductions already following FY22 and FY23 results, and in December 2023 sold 50% of its crate pooling and manufacturing business netting $160m cash.


I suspect Geminder had hoped to acquire the rest of Pact Group at a good price based on the bad results of the past few years, and reap the benefits of not just the turnaround plans already enacted but also the long-term growth in its core divisions expected as the world’s economy moves towards sustainability.



 

Read more M&A articles here.

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