RPC surges after confirming talks over possible offer

RPC Group confirmed that it was in "preliminary discussions" with private equity groups over a potential offer for the plastics manufacturer.

The FTSE 250 group, which has come under pressure from investors over its growth plans, said talks were taking place with both Apollo Global Management and Bain Capital.

Speculation over the weekend emerged from Bloomberg that the £2.8bn company was considering strategic options including a possible sale.

RPC's board stressed that the negotiations may or may not result in an offer for the company.

Chairman Jamie Pike said at July's annual general meeting that "pressure on the company’s market valuation and differing investor views on the appropriate level of leverage is constraining the group’s ability to pursue some attractive opportunities for growth and your board is working to resolve this".

He said management would prioritise cash generation and the disposal of non-core businesses in the short-term.

Some investors and analysts have criticised the company's acquisitive strategy as obscuring the lack of underlying growth. Northern Trust Capital Markets went so far as to say the strategy was a "rights-issue funded, value destroying roll-up story", with weak free cash flow and organic growth not flowing through into profits.

RPC's largest shareholder, Standard Life Aberdeen, told the Sunday Telegraph in July that the company was “highly vulnerable” to a takeover.

Shares in RPC, which were popular among short-sellers, surged 23% to above 850p in early trading on Monday.

This was still a long way from the valuation calculated by JPMorgan Cazenove of 1,262p, based on RPC’s international peers trading on an EBITDA multiple of 9.9x, which drops to 9.1x two years out.

Putting RPC’s expected 2019 EBITDA of £613.9m on 9.9x, with net debt of £1.1bn. Cazenove sees the peers as being Amcor, AptarGroup, Berry, DS Smith, Pact Group and Silgan, noting recent M&A in the sector including Amcor for Bemis, Transcontinental's offer for Coveris and AptarGroup’s bid for CSP Technologies.

"Two parties are having a look which is a good starting point", said analyst Harry Philips at Peel Hunt, mulling what an appropriate price would be. In light of the Amcor bid for Bemis, he noted the latter is trading on a current year p/e of 17.8x and the original deal was on a 11.7x EBITDA multiple.

"If we overlay this onto RPC we get 1330p and 1490p respectively. Clearly, PE will not have the same level of potential synergies so the mentioned numbers are ambitious but what it demonstrates is that RPC is a much mispriced stock."