The first thing that Denis Van Roey did when he joined the Vinventions Group was conduct a financial analysis of the company. “The group was financed by equity from the shareholders, but also by some debts from the bank, which is classic,” he says. “It’s totally usual for this kind of group.”
Van Roey had joined the company in April 2017 and testing the health of the bottom line was a normal part of the job. But as he was reading the data, he spotted an opportunity to save enormous amounts of money — an opportunity that may be open to other multinational wine companies.
It’s all in the rates
After the great crash of 2008, the world’s central banks released a flood of money. The idea was simple: if there was more money sloshing around, banks would feel able to lend. Businesses would expand and the economy would be stimulated. Interest rates fell to historic lows and money became cheap.
The consequences for ordinary people have been dire. Life savings stopped generating interest, while cashed-up investors snapped up every asset they could, driving the cost of residential real estate to outlandish heights. But for many companies, particularly in Europe, the low interest rates have indeed acted as a stimulus. A decade after the crash, companies are again borrowing to invest — witness the many recent South American acquisitions by major European wine companies.
Now, the equation is changing again. As of late 2015, the Federal Reserve in the US has begun to raise interest rates — a process that has not, generally, been followed in Europe. This disparity in interest rates offers a unique financial opportunity for multinational companies such as Vinventions, which has deep roots in both the US and Europe.
Vinventions, which makes closures across all categories, began in 2015, when it acquired Nomacorc, the maker of plant-based closures, based in North Carolina. “We have three plants in Europe, one in Belgium — which is the biggest in the group, where we make PlantCorc,” he says. “We have one facility in Germany where we make natural corks and screwcaps, and one factory in the south of France where we make synthetic corks.” There are also facilities in Argentina, South Africa and China. Globally, turnover is around $150m, says Van Roey.
Van Roey noticed that some of the debt used for financing came from US banks, even though the majority of the company’s revenues came from Europe. This was a problem, because “the US is the most expensive region for financing today”, says Van Roey, explaining that there is a difference of more than two percent between the “base rate” — the minimum interest rate, set by the relevant central bank — in Europe and the US. “In other words, money is much cheaper in Europe.”
On top of that, costs of doing business with US banks are typically higher than in Europe. “When you combine the two elements, you can very quickly have a difference of more than three percent in interest rates between what you get in Europe and what you get in the US.”
So because the company had debt in the US, it had to pay higher interest rates than would be applied elsewhere. To explain the implications of this, Van Roey sketches out a hypothetical company that has a simple split. “If you do 50 percent of all your business in the US and 50 percent of your business outside the US, you have two problems,” he says. “The first one is that you need to flow the money from Europe to the US, because you cannot ask the US to pay for the entire group. Otherwise you have no money to invest in innovation, in improvement and maintenance.”
On top of charges and expenses involved in moving currencies, there is also the risk of the US dollar strengthening, making it more expensive to service the debt. “My responsibility is to make sure that the profitability and the cash flow of the company is not impacted by fluctuations in the interest rate or in foreign currencies.”
Innovation is the core of Vinventions; more than half of its investment is in research and development, so Van Roey needs to ensure enough money is always available. He decided to do something that sounds common sense — move some of the debt to Europe. But what sounds simple in theory is extremely complex in practice. “We started in July 2017,” said Van Roey. “It was an eight- to nine-month process.”
A long road
First, Van Roey created a two-part financing plan. The first part looked at the existing businesses in the context of market conditions. The second business plan broke down the cost and benefits of innovation, region by region, looking at how much cash was likely to be generated in different currencies. “We defined how we should spread the financing between the different regions.” He says it’s important to balance the debt and revenue generated in each particular region, so that “you use the cash flow that you generate in Europe to repay the debt you have in Europe”.
The company decided to have between 60 and 70 percent of its debt in Europe, leaving the rest in the US. Next was the questioning of where the finance was to come from; for such a large amount of money, more than one financial institution was needed. One bank was chosen as the coordinator of the project, as was accounting firm Ernst & Young, which was to assess the tax implications. Then Van Roey went looking for other banks prepared to participate. The banks provide “senior debt”, or debt that is guaranteed; if something goes wrong, the bank can take possession of the assets. Van Roey says senior debt works like a mortgage in that “the bank will not give you 100 percent”.
The rest of the debt is provided by the mezzanine lenders, who work without guarantees but charge higher interest. A third category of finance is equity from shareholders, which is the most expensive of all, because shareholders expect high returns.
Switching debt between continents is not something that Van Roey would suggest lightly; he was consumed by the project for at least three or four months. “You cannot do that every two years,” he says. “It’s too demanding.” Then there are the bank fees, accounting fees and legal fees. “The agreements are around 600 pages in total.”
Van Roey says this kind of financing arrangement is only suitable for companies that meet three conditions: first, they need to be highly profitable. Second, they need to generate a lot of cash — as opposed to businesses that are highly profitable, but need to reinvest or use their cash in others ways. Third, they must be stable, as lenders don’t like volatility. A further important point is that the company needs to be a significant size to be of interest to the banks.
The reason for doing something so complex, says Van Roey, is that the savings are so big. He won’t say exactly how much Vinventions is saving in interest charges, but “we are talking about millions. The reason why this financing is so important is that one of the most important parts of the company is innovation. For us, it’s extremely important to be able to save this money to reinvest.”
The deal was finalised in February 2018, and the company began saving money immediately — freeing up cash for investment. In late March, the company announced that it had acquired Alplast S.r.l., an Italian producer of aluminium closures for wines and spirits, (as well as plastic food closures), for an undisclosed amount.
Today, Vinventions has more than 13 percent of the global share of wine closures, making it the second largest company in the category.
Clearly, it got that way because it’s good at spotting opportunities. An opportunity that is still there for other multinational companies to explore.