Goldman Sachs Makes a Brave M&A Move

(Bloomberg Opinion) -- Apollo Global Management’s reputation for M&A savvy is suddenly under threat. The U.S. buyout firm this week encountered a potential challenge to its agreed $4.4 billion deal for U.K. packaging company RPC Group Plc. Tactics that avoided an auction have now left it unable to fight back against an interloper.

The financial politics here are juicy. The gatecrasher is RPC’s U.S. rival Berry Global Group Inc., a previous Apollo buyout that went public in 2012. Berry’s advisers are Goldman Sachs Group Inc. and Wells Fargo & Co. They have taken on a brave mandate going against Apollo. Doing so risks jeopardizing relations with one of the world’s biggest buyout firms and investment banking fee-payers — all to support a plastic products company worth just $6.4 billion on a deal they may not even secure.

Goldman was previously advising RPC suitor Bain Capital, which decided against a bid. There was nothing controversial about working for one big private equity firm against another in the early stages of the sale process. Attempting to break up an already agreed deal is another matter.

Goldman Sachs Makes a Brave M&A Move

Apollo’s handling of the situation had thus far looked impressive. Stock-market investors had lost confidence in RPC and vice versa. Worries about RPC’s cash conversion necessitated extensive due diligence on the target. When Bain walked away, Apollo was the only option for a company that had given up defending its strategy for remaining independent.

After months in the data room, Apollo agreed a deal that was just 16 percent above the pre-bid share price — and even that measly premium included the forthcoming dividend. It immediately declared the offer “final.” In British bid situations you have to mean what you say. So Apollo cannot raise its offer except in highly exceptional circumstances.

This “take-it-or-leave-it” approach was a smart move to a degree. It deterred hedge fund arbitrageurs from swarming onto the register and demanding that Apollo raise its bid. There would be no point; Apollo can’t. But there’s a wrinkle. The buyout firm could have added in a qualifying clause reserving the right to lift its price in the event of a counter-bid. It chose not to. That was practically an invitation to other suitors. 

Enter Berry, Goldman and Wells Fargo. They have just had a request for due diligence granted. An all-cash offer worth just a few pence a share more would probably kill Apollo’s deal unless the higher bid was on a much longer timetable.

There are still big questions over Berry’s ability to follow through with a firm offer. Either leverage would have to rise substantially, or it will have to raise equity. Berry’s ability to find synergies is also open to doubt given that RPC is already big, so it may be hard for a new owner to improve its buying power. There’s also limited geographical overlap between the two companies. 

If Apollo’s offer of 782 pence a share is its genuine ceiling, it shouldn’t regret missing out if Berry pays 800 pence a share or more. The decision to declare its offer unequivocally final protects its reputation for being a disciplined buyer that pays low multiples. That will keep Apollo’s other M&A targets on their toes, please its clients and help it in future deal negotiations. But it may mean sacrificing this one deal if Berry feels it can justify paying more.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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