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Global glass giant OI’s Australian and New Zealand operations are up for sale, in a deal that promises to be the biggest local manufacturing transaction since Nippon stealthily scooped up the Orora Fibre Packaging business. Writing exclusively for PKN, Paul Allen of Margin Partners provides insights into the upside for potential buyers.

Message in a Bottle: Sting & The Police released this classic song back in 1979 and it continues to generate substantial earnings to this day. Forty years on, Andres Lopez, Owens Illinois (OI) CEO, is hoping for a similar outcome following the release of his own SOS message while delivering the Q3 2019 earning updates for the global glass maker.

For the nine months ending September 2019, the company reported an earnings loss of $450m. This equates to a -$700m swing from the same time just one year prior. Worse still, the company burnt through USD$500m cash and the share price fell from $20 to $8.50 (USD).

What a message! Lopez then followed up with, “Our portfolio review will include a strategic evaluation of the Australian and New Zealand operations”.

OI needs rescuing (and cash) fast, so Goldman Sachs has kicked off the sales process for the five plants in Brisbane, Sydney, Melbourne, Adelaide, and Auckland, with potential buyers now circling.

According to Financial Review, Goldman Sachs pitched the business as "the largest consumer of recycled glass in Australia and New Zealand, going through more than 375,000 tonnes a year".

Goldman Sachs is targeting private equity firms and offshore industry players, as well as local packaging companies. Financial Review estimates the business is worth more than $1 billion.

Here are a few early observations on what promises to be the biggest local manufacturing transaction since Nippon stealthily scooped up the Orora Fibre Packaging business.

Market conditions are favourable for buyers because:

1. Autonomy: Freed from the suffocating oversight and distraction of a global parent in crisis, the local OI Glass business can turn its unreserved attention to its customers and raise their cross-functional service bar to a new level.

2. Conscious Uncoupling: An independent domestic glass operation would be released from obligations to comply with the biased needs of global key customers. The fear of reprisal in other markets dissipates when it’s just two locals dependent on each other to make the supply-demand marriage work.

3. Beer: All five of the OI plants are located within an hour of a brewery owned by either CUB or Lion. They want and need a flourishing glass provider just as much as glass makers need brewers.

4. New Entrants: Not happening. ANZ glass demand is 1.3m tonnes. ANZ glass supply is 1.3m tonnes. No company is going to spend circa $300m on a greenfields glass factory that will produce 300k tonnes and severely over-supply the market. The economics wouldn’t stack up.

5. Retailer Power: Beverage and foods sold in glass in Australia are materially dependant on just two retailers. This polarisation means grocery and liquor suppliers must have incredibly responsive supply chains or risk promotional slots and de-ranging. They can’t wait five weeks for a boat load of glass to arrive, only to discover quality issues.

Priorities for the new owner must include:
1. Getting a very fast grip on the total cost allocated to serve the top ten customers. Customer net-margin isn’t measured and blow outs below the gross margin line are all too easily hidden. Fix this and margin will spike.

2. Up-selling service initiatives. Every airline customer wants to fly first class. Most can’t afford it. Similarly, glass makers need to have the courage and foresight to apply surcharges for added value items that are otherwise given away and justified as relationship-building “freebies”. Fix this and revenue will spike.

3. Share customer-supply contracts with all internal functions so that they can follow them. The cultural mindset of “we give our all for our customers” needs tackling. Customers never sign up to “buy your all”, so shut down the all-you-can eat buffet and start offering “bronze, silver or gold” packages. Fix this and you can give customers everything they want on your terms, not theirs.

This is all likely to unfold in the lead up to year end. In the meantime, all concerned will be watching the horizon for a response to the chorus from the popular song. “I hope that someone gets my… I hope that someone gets my… message in a bottle.”

Paul Allen is MD of the Margin Partners advisory and author of Take Back your Margin. He consults extensively across the FMCG & manufacturing sectors and is a former OI Glass sales & marketing director.

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