In corporate finance the ‘pecking order theory’ would tell you that the cheapest form of finance is internally generated cash, the next cheapest is debt and the most expensive, and therefore the most risky, is equity.
It therefore came as little surprise to us when a piece of research questioned the motivation and incentives of RPC management as they continue to roll up the European plastic packaging market by equity funded acquisition.
The acquisition story is a compelling one. RPC are one of the largest players in a very fragmented European plastic packaging market. With every acquisition the drop down synergies, which mainly come from their polymer purchasing power, are significant. This means that they are able to command better margins and outprice smaller incumbents.
As part of this strategy, earlier this year RPC completed their sixth equity raise in as many years as they sought to begin the same roll-up story in America.
The question now is whether you buy the acquisition story at a discount to historic valuation or whether you continue to question management in funding that same story by the most expensive source of finance as opposed to the cheapest.