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Pact Group shareholders face dilemma

Minority shareholders in Melbourne-based packaging company Pact Group (ASX:PGH) find themselves at a crossroads in the face of a 68 cents per share cash buyout offer from the company’s chairman and largest shareholder, Ralph Geminder. Just thirteen months ago, the share price stood at approximately $1.44, but with the recent buyout proposal, it has plummeted to 68 cents.

A revised version of the bidder’s statement, released on Monday, reiterates the reasons behind the 68 cents per share offer. Nick Perkins, CEO of the bidding company, Kin Group, stated, “The Offer provides Pact Shareholders with liquidity and certainty through an unconditional, all-cash offer, allowing Pact Shareholders to avoid any further risk associated with their investment in Pact.”

The bidder’s statement also highlights the challenges faced by Pact, including supply chain disruptions, inflationary pressures, fluctuating resin prices, labor constraints, and macroeconomic uncertainty, which have adversely affected the company’s operations and financial performance.

Among the reasons restated in Monday’s announcement are the stark statistics that show “Pact’s share price has significantly declined by 87.1% over 6 years; Pact has lower earnings, higher leverage, higher capital expenditure, and reduced free cash flow in FY23 compared with FY18.”

Furthermore, accepting the offer would shield shareholders from further share price fluctuations and reduce the risk of a further decline. Kin Group’s controlling interest of over 50% in Pact makes competing offers highly unlikely. The bidder’s statement emphasizes that without Kin Group’s offer, the future value of Pact shares remains uncertain.

This situation raises questions about the management of the company over the past six years. With Mr. Geminder serving as non-executive chairman and providing the funds for the bid, supported by his 50% plus stake in the company, it appears that the deal is all but sealed. CEO Sanjay Dayal has been in his position since 2019, and most of the board members have served for an extended period.

The bidder’s statement argues that staying with the company as it goes private could mean an uncertain future for shareholders. Since the offer is unconditional, it appears inevitable, with only the final level of acceptances yet to be determined.

Kin Group intends to delist Pact but expresses confidence in the company, its employees, and its long-term future. They believe that privatization, coupled with additional investment, will enable Pact to pursue its growth strategy in the circular economy.

However, it is worth considering that Pact’s struggles have been exacerbated by the rapid economic downturn caused by the pandemic and the subsequent inflationary pressures, particularly driven by Russia’s invasion of Ukraine, leading to soaring energy costs and raw material expenses for packaging companies, particularly in 2022-23.

For the remaining Pact shareholders, it seems there may be no alternative but to accept the offer from interests that have held significant influence over the company for the past decade, despite their inability to keep it financially afloat.

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