Packing a punch
Shares of global packaging giant Amcor (ASX:AMC) have edged higher since our last review, with it all fairly quiet on the corporate announcement front…until this week. The company has confirmed the US$5.25 billion acquisition of US based rival Bemis to create the world’s biggest manufacturer of flexible plastic packaging products. The shares have resumed from a trading halt today lower, but we believe the deal has substantial financial and strategic merit.
We expect the market will appreciate this in time, but as the dust settles on the deal announcement, and with integration complexities to be worked through, we are reverting to a HOLD recommendation on Amcor.
The Deal
Amcor (ASX:AMC) is buying US-based competitor Bemis after more than a year of negotiations, in what is the 12th biggest M&A transaction by an Australian company. Under the all scrip deal, Amcor will pay 5.1 shares for each Bemis share, giving Amcor around 71% of the combined company. The price equates to a 25% premium to Bemis’ closing price on August 2nd and equates to around 18 times earnings, which is not expensive given the scale and synergistic benefits on offer in our view.
The enlarged entity will have a primary listing on the NYSE and will maintain a listing in Australia. The combined estimated market capitalisation will be circa US$17 billion, with expected inclusion in both the S&P500 and ASX200 indices.
Source: Amcor (ASX:AMC) Investor Presentation
Bemis operates 56 packaging plants in 12 countries, with a workforce of 16,000. Amcor operates 200 packaging plants in 43 countries. The group will have total annual revenues of around US$13 billion, earnings of US$2.2 billion and cash flow of more than US$1 billion.
Source: Amcor (ASX:AMC) Investor Presentation
We noted in our last review that sharply rising input costs have posed a headwind to profits for Amcor (along with other packaging manufacturers), and the transaction is partly motivated by this in our view. Amcor is expecting the transaction to achieve a double-digit boost to pro-forma earnings per share and run-rate cost synergies of around US$180 million (by the end of year 3).
We also highlighted previously the considerable scope for consolidation in the fragmented packaging industry and that as the number one or two player in most of their market areas, Amcor should be able to grow market share profitably via acquisition by leveraging already strong footprints. In the end Amcor has ‘swung slightly harder’ than we expected, but we think that the deal is a good one.
The transaction is however consistent with other moves globally, which is likely another motivation. Smurfit Kappa in Ireland, after rebuffing a hostile bid from International Paper, is buying Dutch firm Reparenco, while DS Smith (cover by our UK Equities research team) is buying Spanish rival Europac for €1.7bn. Kill or be killed as they say.
The deals also signify that despite the environmental concerns, the demand for plastics remains in growth mode. The FT has noted how consultancy firm Smithers expects the demand for flexibles to grow at an annual rate of 4.3% through to 2022.
Against this backdrop, combining with Bemis will enable Amcor to secure a ‘comprehensive footprint with greater scale in every region.’ The deal will also boost the exposure to faster growing developing markets. The enlarged business will cover 30 emerging markets, with sales of around US$3.5 billion.
Source: Amcor (ASX:AMC) Investor Presentation
Amcor CEO Ron Delia said of the deal that “Amcor identified flexible packaging in the Americas as a key growth priority and this transaction delivers a step change in that region…There are an increasing number of opportunities arising for a leading packaging company to capitalize on shifting consumer needs, an evolving customer landscape and the need to provide responsible packaging solutions that protect the environment”.
Source: Amcor (ASX:AMC) Investor Presentation
No business landscape sits still, and the deal also reflects that the fact that the traditionally defensive packaging segment is also evolving with changing consumer tastes, on-line disruption (and opportunities), and an increasingly environmentally conscious public and shareholder base.
Amcor has done a good job at keeping up with the times, and the take-over is another reflection of that. Greater purchasing power and scale will drive procurement savings, while Bemis also boasts cutting edge technical expertise in the likes of food packing film. On the environment, Amcor’s CEO noted that the deal will help the company’s ongoing commitment to increasing the use of recycled materials – Amcor was the first to commit to making all of its products recyclable or reusable by 2025.
Amcor have done a great job of building out the global footprint, and integrating acquisitions, so while somewhat more significant, this bodes well for the Bemis tie-up. With 70% of Bemis’ revenues in the US it could also prove a smart move if the A$ continues to weaken.
Source: Amcor (ASX:AMC) Investor Presentation
The ‘new Amcor’ balance sheet will also be robust, with management classifying it as ‘investment grade’. This will increase the company’s ability to extract synergies through further (albeit smaller) deals going forward.
Amcor expects the new company to continue to adopt a ‘compelling, progressive’ dividend. The transaction is subject to regulatory approvals (we see this as no issue given recent global combinations) and has a target close of calendar year 2019.
Turning to the technical picture, and the on daily chart, the situation had improved markedly since our last review (albeit the shares have tracked lower after returning from a trading halt post the acquisition announcement today). Support at the 78.6% Fibonacci retracement of $14.51 had been reclaimed (but given way today) as has that $13.89. Near term prices may well oscillate around the 78.6% Fibonacci retracement as investors digest the implications of the takeover.
With reference to the monthly chart, dynamic support has given way at the medium-term uptrend line of $15.28 (upward sloping solid-green line). Support has held at the November 2016 low of $13.62 which is encouraging. A move back above the 61.8% Fibonacci retracement at $15.50 would improve the outlook further and lay the ground for a move back above the medium-term uptrend.
Summary
Shares of global packaging giant Amcor have edged higher since our last review, with it all fairly quiet on the corporate announcement…until this week. The company has confirmed the US$5.25 billion acquisition of US based rival Bemis to create the world’s biggest manufacturer of flexible plastic packaging products. The shares have resumed from a trading halt today lower, but we believe the deal has substantial financial and strategic merit.
We expect the market will appreciate this in time, but as the dust settles on the deal announcement, and with integration complexities to be worked through, we are reverting to a HOLD recommendation on Amcor.
