Last Wednesday, packaging giant Amcor (AMC) announced that it was combining with (acquiring) US consumer packaging business Berry Global Group. The ‘all scrip’ deal will result in Berry shareholders getting 7.25 Amcor shares for each Berry Group share they own.
The combined company (Amcor) will be owned 63% by existing Amcor shareholders and 37% by Berry Group shareholders. With a market cap of US$23 billion (about A$35 billion), it will be headquartered in Switzerland and listed on the NYSE (New York Stock Exchange) and the ASX.
Like most deals, this looks like it makes sense “on paper”. But the track record of business combinations is mixed, so Amcor shareholders will be worried about execution risks with the Berry combination and what it means for the share price.
Let’s take a closer look.
Amcor & Berry to combine
Globally, the plastics packaging market is quite fragmented. Amcor is the global leader in ‘flexibles’ (packages that change shape as they are filled, for example, a vacuum sealed pouch) while Berry is a global leader in ‘containers and closures. Berry also manufactures ‘flexibles’, as well as specialty healthcare packaging solutions. Amcor produces containers in some regions, and provides specialty proteins, liquids and healthcare packaging solutions. Increasingly, customers are demanding sustainable packaging, and this involves specialised and innovative solutions from the packaging manufacturer.
So, the central thesis for the combination is that it brings together two complementary businesses that will have the scale to accelerate growth and better serve customers. Flexibles will account for about 60% of revenue, containers and closures about 40%. Bridging these segments will be Amcor’s specialty healthcare platform.
Geographically, Amcor’s footprint will shift to 50% North America, 30% Western Europe and 20% Emerging Markets. In the higher growth emerging markets, Berry is stronger in Eastern Europe, Amcor is stronger in Asia and Latin America.
In the high growth, high margin categories (healthcare, protein, beauty and personal care, liquids, foodservice and pet food), the combined entity will be better placed to apply innovation capabilities, material science expertise and specialised tooling, design and multi-component assembly capabilities.
The combined entity is expected to have revenue of US$23.9 billion and EBITDA of US$4.3 billion. Amcor’s margin will improve from 15% to 18% due to revenue and cost synergies. The combined group will employ about 70,000 people, operate from more than 400 facilities and service customers in 140 countries. It will have 1,500 R&D professionals operating in 10 innovation centres worldwide with combined R&D investment of US$180 million per annum.
The synergies of an annual earnings impact of US$650 million are staggering. US$325 million comes from procurement savings, with a further US$160 million on general and administrative expenses. Growth synergies of US$60 million, financial synergies (interest costs) of US$60 million and US$45 million in operational savings make up the balance. Amcor says that these annual savings will be delivered by the end of year 3, with approximately 40% realized by year1, 80% by year 2 and 100% by year 3.
In addition to cost and revenue synergies, there is an additional $280 million of one-time cash benefits by optimizing the working capital needs of the combined business.
Financially, the deal is expected to deliver:
- Revenue growth above market, accelerating by at least 1%.
- Combined annual cash flow of over US$3 billion, which will provide significant capacity to fund organic re-investment, a compelling dividend, value accretive M&A and share repurchases.
- Higher expected earnings growth from 10–15% pa to 13–18% pa; and
- EPS (earnings per share) accretion of 35% and “double digit” return on investment.
The deal has been unanimously endorsed by both Boards and is subject to shareholder and regulatory approvals. Closing is targeted in the middle of calendar 2025.
What do the brokers say?
The brokers in the main were supportive of the transaction, noting the risk in delivering the synergy benefits. While saying the merger was logical, Citi identified a downside case coming from Berry’s cyclical portfolio.
With the exception of Ord Minnett, all left their target price unchanged. Ord Minnett upgraded from “lighten” to “hold” and raised its target price from $14.10 to $15.50.
The range of target prices is quite narrow, from a low of $15.50 from Ord Minnett through to a high of $17 from Citi. The consensus target price is $16.12, 0.4% higher than Friday’s closing ASX price of $16.06.
As the table below shows, all the recommendations are “neutral”.
On multiples, the brokers have Amcor trading around 14.4 times forecast FY25 earnings and 13.4 times forecast FY26 earnings (pre Berry). Based on a $16.069 share price and forecast $0.77 dividend, it is yielding 4.8%.
Amcor (AMC) –11/23 to 11/24
Source: nabtrade
What’s the bottom line?
The market has reacted well to the announcement of the transaction, in part because Amcor has a solid track record of acquisitions and delivering synergy benefits. But the quantum of the benefits (US$650 million) means that the jury will be out for some time.
There are also headwinds facing the plastics industry as manufacturers (and their consumers) demand more environmentally friendly and sustainable packaging. That’s where Amcor’s investment in R&D and its ability to scale and target higher margin segments becomes so critical.
One thing that Amcor has demonstrated over the last couple of years is reasonable pricing power.
On the numbers, Amcor on price earnings (PE) of around 14 times doesn’t look too demanding, and its dividend yield of 4.8% (unfranked) is reasonably attractive.
Although history tells me that the market will be cautious on Amcor for some time, I am inclined to back management and the transaction. I think it’s a long term buy.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
