Brokers Forgive Amcor Acquisition

This story features AMCOR PLC. For more info SHARE ANALYSIS: AMC

-Immediate scale in key LatAm market
-Synergies with existing business
-Sales in defensive end markets
 

By Eva Brocklehurst

Amcor ((AMC)) will acquire Alusa, a manufacturer of flexible packaging in South America, for US$435m, a transaction welcomed by most brokers as it provides a strong regional presence which will complement Amcor's existing business.

Amcor expects to realise a 15% return on investment (ROI) target by year three and 20% by year five. The longer path to Amcor's previous ROI benchmark – 20% by year three – is considered largely justified by Alusa's market position.

Ord Minnett expects the transaction to be around 2-5% accretive in the first three years. The broker does not consider the additional two years to the ROI target a major issue, given the company's strong track record in delivering value-accretive acquisitions. Moreover, Alusa offers immediate scale in South America and Amcor avoids having to consolidate several smaller entities over a longer time frame to achieve equivalent scale.

Alusa currently generates revenue of around US$375m per annum which means, in combination with Amcor's US$100m in flexibles sales in the region, the combined group holds 10% share of the addressable end market. Ord Minnett suspects this will provide a solid foundation for smaller, bolt-on acquisitions in the future.

Deutsche Bank also considers the acquisition is justified at a lower return as it provides an additional platform to grow in Amcor's preferred markets. Having created the Flexible Americas business in July 2015, Amcor has almost doubled its sales projections to US$1bn with this acquisition, the broker notes.

The Alusa business services multinational and large regional customers across the food, personal care and pet food segments. Its capabilities include film extrusion, flexo, gravure printing and lamination. Amcor is targeting synergies of US$25m by year three across procurement and manufacturing.

While the return profile is more extended, the company's track record recommends the transaction to Macquarie. There is also enough margin for value creation, the broker adds.

Of interest, Macquarie notes the average working capital of Alusa is double Amcor's flexibles average, which should entail material working capital release. The broker estimates this represents up to $30-40m in potential savings and, while it take time to be realised, adds 125 basis points to the return from the acquisition.

UBS also excuses the lower rate return, given the scale. Sales are mostly derived from defensive end markets, with food making up around 65% of revenue and personal care accounting for the remainder. Moreover, UBS notes around 40% of Alusa's sales are to large multinationals which Amcor mostly counts as customers elsewhere, providing the opportunity for additional revenue synergies.

The acquisition also appeals to Credit Suisse, given it is a quality business that should bring both value and earnings accretion. The broker believes a relaxation of Amcor's acquisition hurdle of 20% is critical if it wants to grow in North America. Achieving critical mass with small bolt-ons would be too hard over a reasonable time frame in Latin America, the broker suggests, let alone in North America.

Morgan Stanley stands apart from other brokers in that it suspects the company has run out of momentum and may find further acquisitions of this type difficult in the near term.

The broker notes this is the most sizeable transaction since the company's Alcan acquisition in 2010 yet, despite significant capital allocation, the transaction is likely be broadly neutral to FY17 earnings estimates and 2.0% accretive in FY18. Morgan Stanley considers the stock overvalued, retaining an Underweight rating.

Alusa has production facilities in Chile, Argentina, Peru and Columbia and supplies all other countries in the region. The current owner, Chile-listed Techpack, requires shareholder and regulatory approvals on the sale and Amcor expects the deal to be completed in coming months.

Hence, Morgans makes no adjustments to earnings forecast at this stage but will review estimates once the deal is finalised. Still, the broker considers Amcor deserves to trade at a premium given its stable and defensive growth profile and superior financial returns relative to the market.

The size of the South American flexibles market is considered to be US$4.8bn, growing at 3-4.0% per annum. Deutsche Bank notes there is a similar sized competitor, but without the geographical reach, while the number three player is half the size of Alusa.

The consensus target on the FNArena database is $14.77, suggesting 3.5% downside to the last share price. This compares with $14.32 ahead of the news. Targets range from $12.07 (Morgan Stanley) to $16.50 (Macquarie). The database has four Buy ratings, three Hold and one Sell (Morgan Stanley).
 

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