Apollo Global Management has picked up an asset that no one else wants. That’s what happens when you avoid auctions.

The U.S. private equity firm has agreed to pay 3.3 billion pounds ($4.3 billion) for U.K. plastic packaging firm RPC Group Plc. For the deal to make sense, the buyer has to know something that the many investors who were shorting the stock, and other potential acquirers, do not.

Until a few years ago, the market cheered RPC as it bought one company after another. Then in early 2017, sentiment turned. The roll-up strategy added complexity. Bearish analysts at Northern Trust Securities LLP questioned the group’s ability to generate cash. In July, with the shares trading at 775 pence, RPC’s chairman put the company up for sale with some unsubtle comments at the annual shareholder meeting.

Apollo’s deal looks cheap on standard metrics. The 790 pence-a-share offer, including the forthcoming dividend, is just 8 percent above RPC’s average share price in the three months before the firm’s interest emerged in September. The market may have fallen since then, but however you cut it, it’s still a measly premium. Include assumed debt and the acquisition values the company at 4.4 billion pounds, just seven times expected Ebitda. That’s a 26 discount to peers, JP Morgan analysts reckon.

The terms reflect RPC’s weak negotiating position. The company had no standalone defense given the market’s loss of confidence. The tangled history of acquisitions meant lengthy and costly due diligence was required. That would have restricted the pool of suitors to those with industry knowledge. Having previously owned RPC’s rival Berry Global Group Inc., Apollo had a natural advantage.

The private equity firm’s probing must have given it comfort that RPC has the capacity to generate more cash than has appeared to be the case. Perhaps things will improve as acquisitions start generating synergies, instead of one-time integration costs. But it still has to make a return.

A 30 percent equity check for the all-in cost would be far from racy for Apollo. The bill would come to 1.4 billion pounds, implying the need to borrow the other 3 billion pounds by lifting RPC’s net borrowings to around five times expected Ebitda. The public markets would balk at such leverage.

To make a minimum 20 percent internal rate of return over five years would require exiting with about 4 billion pounds of equity. One scenario would be for Apollo to sell the business for 6 billion pounds, having reduced debt to around 2 billion pounds.

To hit that target would require increasing Ebitda by around 750 million pounds, or 4 percent a year – a challenge given how increasingly environmentally conscious consumers are turning against plastic packaging. The eventual sale would also have to value RPC at about eight times Ebitda, a notch higher than at the acquisition, something that would only possible if Apollo is able to present a cleaner, simpler business to the world.

The big unknown here is whether this RPC really is capable of sustaining such leverage and generating the cash to pay down its debt under its new owner. But if anyone should know, Apollo should.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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