Klöckner Pentaplast - Back to the recap table.
All,
Please find a light update on Klöckner Pentaplast here.
Negotiations have hit an impasse as we hear that the so-called Pharma division is still not doing well. We read reports of €80m of overdue payables and understand creditors are supplying a €110m bridge facility while preparing the restructuring. In hindsight, we should not just have sold our position last month, but should have gone short altogether. We were only tidying up our balance sheet, and there may have been no borrow in the first place. Now, the situation may become more interesting from a fundamental long perspective, although, absent further information, we find it still a touch rich.
Investment Rationale:
- We had become concerned about the time KP was taking to close a deal that, following the agreement with the SUNs, should have come quickly. Having been long this name for most of the year, we traded out at the beginning of this month, but failed to take the trade to its logical conclusion, and go short immediately.
- On our math, both bonds remain overvalued, although we understand that the SUNs should trade at an option premium to our calculated consensual restructuring above. We are working with a €200m cash injection into the company to address the reported payables gap of €80m and leave a comfortable liquidity cushion, given we assume there will be no more RCF after it's been fully drawn.
Key Conclusions:
- Debt capacity equates to roughly 5x IAS 17 EBITDA, implying reinstatement potential in the low-70c/€ range, with secured creditors also likely to obtain ~20c/€ in equity; SUNs could push for ~10% equity via lower Luxco claims and nuisance value (Recap Table).
- Fresh cash providers could take ~40% of equity, giving them an attractive ~30% (very) theoretical day-one return (Recap Table).
- Rumours of weak results have led us to trim growth expectations, particularly as high-margin Pharma revenues must have underperformed; management’s de-stocking explanation looks insufficient, raising concern over more structural issues (Drivers / Industry / Company).
- Despite forecasting >60% cash conversion, leverage is so extreme that enterprise value struggles to cover the debt stack; KP still values closer to FP peers than US Pharma players, given limited exposure to the latter market, despite KP’s strategic aim is to shift revenue mix toward higher-margin North American Pharma and away from lower-margin European FP (DCF).
- The US threat of Pharma-specific tariffs introduces uncertainty over supply chains, potentially disrupting KP’s customer relationships; while Pharma is the most highly valued exposure, KP’s North American footprint remains modest (Industry / Company).
- Only about one-third of the Pharma, Health & Durables segment is true Pharma; blending it with other activities risks overstating enterprise value (Company).
- Legally, creditors hold strong positions through guarantees at Luxco holdings and priority in the cascade; baskets for new debt exist, but in any event, recoveries would break within the secured layer, placing control firmly with this creditor class (Legal).
Summary:
- Germany headquartered plastic film producer for Packaging, employing 6,000 employees in 30 plants around the globe and along two divisions:
- Pharma, Health & Durables ("PHD"): Product offering centres on barrier rigid films (blister packs for pills). This is the higher-margin divisions, as films need to adhere to high standards.
- Food Packaging ("FP"): Product offering centres on rigid films (see-through plastic lids for your take-away sushi tray). This is the most commoditised product group in the lineup.
- Primary input costs include PET and Recycled PET. Prices can fluctuate, and although the company has pass through arrangements, these have a lag. Pass through can be more difficult in commoditised products where a supplier can more easily be substituted and where the packaging tends to command a higher share of wallet than in the pharma sector.
- KP claims to be the leading supplier in 70% of its end markets.
- Since taking over KP in 2012, the shareholder has injected and withdrawn cash from the company. We calculate that the shareholder has no more skin in the game - except reputation.
- The usually more stable Pharma division suffered de-stocking in 2023 following the end of the coronavirus pandemic. Management have been rationalising costs, and 9-month 2024 EBITDA was up, if below 2022. The more commoditised Food Packaging division was still struggling to pass on a R-PET price rise. Management expected the de-stocking to have come to an end and to pass on R-PET costs in 2025. An unspecified list of Pro Forma adjustments signalled €40m of cost improvements in 2025 that management claimed had already been implemented.
- Following extension of the SUNs in early 2025, reports surfaced in August '25 that KP's suppliers were beginning to withhold deliveries as the company had amassed €80m of overdue payables. The RCF was only five months from maturity. The same reports claimed that the Pharma division was not doing well, suggesting that beyond de-stocking, there is a bigger problem.
- Maturities are approaching, and low FCF suggests the company finally needs another restructuring.
The Moving Parts:
- Restructuring: Maturities are approaching fast and in particular of the PHD division, performance has been suffering. So, an A&E transaction, as envisaged earlier in the year, now seems unlikely.
- We understand that KP are juggling €80m of overdue payables, which sounds reasonable, considering its vast expansion in payables days. A restructuring will require a hefty cash injection.
- Comps are trading with EBITDA margins in the 20%s. KP has not done so as long as we can look back. The Pharma division contains a segment previously dubbed Specialities. So we may not be comparing apples with apples, and the upside may not be as great. Also, the strong trading at pharma-oriented competitors sat oddly with the alleged sector-wide pharma de-stocking narrative.
- US tariffs: Seven plants in the US suggest that KP could manage, even benefit from, any sector-wide shift of film production to the US. However, we do not know how much of the pharma sales to European customers are subsequently destined for the US. As the US are preparing specific Pharma tariffs, we are concerned for revenues in KP's cash cow.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk