Nothing Comes Between Goldman Sachs and a Deal

(Bloomberg Opinion) -- Don’t underestimate the ability of Goldman Sachs Group Inc. to get the deal.

Advised by a team led by the U.S. investment bank and lender Wells Fargo & Co., packaging group Berry Global Group Inc on Friday robbed Apollo Global Management of the acquisition of U.K. peer RPC Group Plc. The transaction shows off Berry’s tactical cunning and opportunism, and exposes a miscalculation by Apollo.

To recap, RPC used its last annual meeting to hint it was open to bids. Apollo made an approach. So did buyout rival Bain Capital LP, the horse that Goldman was initially backing. It’s likely that other bidders, Berry among them, had a tentative sniff around back then. But by January Bain had walked and the only formal bid was Apollo’s 782 pence a share offer, which RPC accepted.

The negotiation was clearly tough. The agreed price was a low multiple of just 7 times estimated Ebitda. To ram home that Apollo was not going to be pushed higher, it declared its offer “final,” formally constraining itself from adding a sweetener at any point. Apollo could have given itself a get-out to raise its bid in the event of an interloper showing up, but chose not to. Now Berry has offered 793 pence a share, Apollo can’t re-bid.

Nothing Comes Between Goldman Sachs and a Deal

Maybe Apollo is fine with this. Even if it could counter, it would have to dangle something closer to 800 pence a share. If that is above Apollo’s pain threshold, the inability to get into an auction is irrelevant. Apollo will have meanwhile reinforced its reputation for being a disciplined buyer.

But the fact remains that Apollo misjudged the probability of a counterbid from Berry, a company it used to own and where it had a board seat until recently. It has sunk a lot of time into a lost deal.

The question is whether Apollo has underestimated Berry’s cleverness or its recklessness. For starters, Berry has only had time to do “high level” due diligence. The cost of the acquisition, including assumed net debt, is 4.5 billion pounds ($5.9 billion). The U.S. buyer will have to take on high leverage for a public company.  Berry envisages annual savings of 115 million pounds annually. Add those to RPC’s forecast operating profit for 2021, adjust for tax, and the potential return on investment exceeds 10 percent. But shareholders have to take this on trust given Berry’s assessment is based on a limited delve into the business.

A cash offer that was just 1 pence a share higher than Apollo’s would have been worth taking, as long as it could have been executed quickly. So the 11 pence top-up is an achievement on RPC’s part given its negligible negotiating leverage.

There’s a broader lesson here for M&A practitioners in the British market. Couching “take it or leave it” offers with a get-out clause for counterbids almost certainly deters gatecrashers. “Doing an Apollo” and saying “final means final” might just encourage them.

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.

©2019 Bloomberg L.P.