Amcor Limited (AMC) – Packaging play

Amcor plc develops, produces, and sells packaging products in Europe, North America, Latin America, and the Asia Pacific. The company operates in two segments, Flexibles and Rigid Packaging. The company was incorporated in 1926 and is headquartered in Zurich, Switzerland.

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Amcor (AMC) has unveiled a friendly takeover of rival packaging group Berry Global for US$8.4 billion ($12.9 billion), aiming to capture targeted cost savings and revenue benefits of US$650 million per annum within three years of the acquisition’s completion.

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The all-scrip deal will see Amcor shareholders emerge with 63% of the combined entity, which will retain the Amcor name, and Berry shareholders with 37%. The deal, expected to close in the middle of next year, expands Amcor’s reach to more than 140 countries and its network to more than 400 production plants.

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The benefits from the takeover should provide strong EPS accretion, although there is a question mark over whether the expected improvement in margins can be maintained over the longer term.

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Another issue to consider will be the greater skew to US ownership of Amcor post the takeover. That proportion would increase to 74% post the takeover from circa 58% currently, and may result in a share overhang given Wall Street’s propensity to value packaging stocks at lower metrics than the Australian market.

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Post the acquisition announcement and model update, we raise our target price to $15.50 from $14.10. On balance, and considering the 7% fall in November to date of Amcor shares, we raise our recommendation to Hold from Lighten.

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