Buying Bemis

Amcor has dramatically accelerated its US expansion with an all-scrip takeover of Bemis Co that values the Wisconsin-based food-packaging producer at US$6.5bn. The deal, which Ord Minnett views as firmly in line with Amcor’s strategy, has been unanimously approved by the boards of both companies and is now subject to regulatory and shareholder approvals, with completion expected in first-quarter 2019. The combined entity will be the largest producer of flexible packaging in the world.

 

The flexible packaging market in the Americas has consistently been flagged as a focus segment by Amcor management. This transaction improves the earnings growth outlook for Amcor, due largely to synergies, provides a significant flexibles platform for the company to continue its M&A agenda, and still leaves sufficient headroom on the balance sheet for further investment.

 

  • Offer details – The scrip ratio is 5.1 Amcor shares for one Bemis share, with Amcor shareholders to own 71% of the combined entity and Bemis shareholders 29%, and represents a 25% premium to the Bemis closing price on Thursday, 2 August. The deal values Bemis at about US$6.8bn. The market capitalisation of the combined entity is estimated at around US$17bn.
  • Revenue and cash flow outlook – The new company expects to have annual revenue of US$13bn, operating earnings of US$2.2bn, annual cash flow after capital expenditure of more than US$1bn, and an investment-grade balance sheet. We notes that post the announcement in the US, ratings agency Standard & Poor’s placed Bemis on credit watch with a positive outlook.

 

Based on pro-forma FY19 EPS forecasts, we estimate the ‘new Amcor’ is trading on a P/E multiple of around 16x excluding the Bemis synergies, or 14x including all of the US$180m targeted synergies. Both of these figures represent a significant discount to the S&P/ASX Industrials Index and Amcor’s trading range in recent years, leading us to maintain our Accumulate recommendation and our target price of $15.80.

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