Last week, Amcor announced it would demerge its Australasian packaging business from its global packaging business by December this year.
The company believes the move will release value for shareholders, but it looks more like a case of untethering the high-growth international business from the more mature Australasian business.
The company’s explanation is that its Australasia and Packaging Distribution (AAPD) business is fundamentally different to the rest of the group. Its main product groups are fibre, glass and beverage can packaging across Australia and New Zealand.
The Amcor international business is flexible and rigid plastic packaging for the health, food and tobacco industries. Its biggest growth markets are in Asia, where the rapid improvement in per capita wealth is driving the demand for more sophisticated packaging solutions.
Show me the money
The big hint about where the most value lies in this demerger is that Amcor chief executive Ken MacKenzie has pegged his slate to the global business and retained his chairman Graeme Liebelt.
The AAPD business, which will be renamed once it is separately listed on the ASX, will be steered by its current President Nigel Garrard and will be chaired by Chris Roberts.
There is nothing particularly wrong with that allocation of responsibilities, but it will allow Amcor to pursue the next leg of its growth strategy unencumbered by the AAPD business.
Amcor’s track record over the last four years has been very good, mainly due to its brave decision in February 2010 to fork out US$1.95 billion to buy the Alcan Packaging business from Rio Tinto.
At a multiple of 5.1 times operating earnings, Amcor scored a bargain and at exactly the right time. The synergies between the businesses were large, and Amcor had the expertise to extract the benefits and make the combined businesses better.
Amcor has made more acquisitions since and has repeated the exercise with similar success.
The detraction
The one factor holding it back in recent years has been the rising level of the Australian dollar. For a business that earns most of its profits in US dollars, translating those profits back into Australian dollars was hurting the bottom line. Now that the US dollar is lifting again, those translations will begin to put some icing back on Amcor’s earnings cake.
The global packaging industry has undergone a period of consolidation over the last few years, with Amcor playing its part as the big guys get bigger.
The demerger details will not be known until the Scheme Booklet is released later this year, so crucial elements, such as the capital structure of each company, remain under wraps.
For now, investors have exposure to a relatively defensive business with leading global positions in some very resilient industries.
Asian opportunities
However, investors should not assume the word ‘defensive’ implies the company is devoid of growth opportunities. In fact, the opposite seems to be true, as Asia marches towards more consumer-oriented economies and the US economy regains its mojo. Europe is another matter, but at some point it must also recover.
Packaging has become a quite sophisticated business with the complexity and compliance levels requiring substantial research and development. Having core skills in new product development is important to winning new business and Amcor has a good track record in this regard.
In June 2009, Amcor’s share price was sagging at $4.67 but the progress in acquisitions and execution since that time has seen the price steadily lift to the current $10.85 per share. That’s a ‘lazy’ 23% per annum return excluding dividends.
[1]We are expecting FY13 EBITDA for AAPD of approximately $290 million. Placing a 7 times multiple (the average packaging company acquisition multiple over the last three years) on AAPD’s earnings values it at about $2.0 billion.
The amount of debt to be included is not yet known, but Amcor’s group net debt of $3.7 billion is not excessive and represents 2.2 times net debt to EBITDA.
The demerged AAPD business could potentially be seen as a mature dividend-paying business depending on its capital structure and strategy.
The remaining Amcor business could be seen as a more concentrated global growth business with an increasing exposure to high growth Asian markets.
Either way, Amcor looks like a good portfolio stock.
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.
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