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Morningstar | All-Scrip Offer For Bemis Provides Upside For Amcor Shareholders Contrary To Market Reaction

We increase our fair value estimate for narrow-moat Amcor by 10% to AUD 15.40 from AUD 14.00, following the announcement of a major all-scrip deal to acquire Bemis Co., the leader in flexible polymer packaging in the U.S., and following a transfer of analyst. Under the all-share deal, Amcor will issue 5.1 shares for every Bemis share, leaving existing Amcor shareholders with circa 71% of the new, combined entity. Cost synergies of USD 180 million per year have been estimated by Amcor's management, expected to be gradually realised over the coming three years. While we are cautious on the realisation of these synergies, and expect 70% or USD 126 million of the announced cost savings to be realised, we note the market is more pessimistic, with the share price reaction implying that only 35% of identified savings will ultimately be found. Under our forecast scenario, the deal adds AUD 1.14 per share to Amcor's valuation with the remainder of our fair value estimate uplift being attributable to time value of money.

The deal will further cement Amcor's position as a global plastics giant. With 70% of Bemis’ USD 4 billion in annual sales generated in North America, the deal will beef up Amcor’s underweight position in the North American flexibles market where it generated USD 810 million in sales in fiscal 2017. Meanwhile Bemis' subscale positions in Asia, Europe, and Latin America makes the tie-up quite complementary given Amcor's flexibles scale in these regions.

We're also positive on the combination's effect on Amcor's moat. We see the acquisition as reinforcing Amcor's sustainable competitive advantages, adding significant incremental scale in North America and thus reinforcing its cost advantage. It also brings with it Bemis' moat-worthy proprietary technology and IP associated with its ranging of meat, cheese and other protein packaging into the Amcor portfolio.

Our AUD 15.40 per share fair value estimate for Amcor stems from our stand-alone valuations for both Amcor and Bemis, plus the present value of estimated synergy realizations. We estimate enterprise values for Amcor and Bemis as stand-alone businesses at USD 15.8 billion and USD 5.9 billion, respectively. Further, we expect USD 126 million, or 70% of targeted synergies, to be realized by 2021, with USD 150 million in implementation costs per management's guidance. At present, we believe there is a 100% chance of deal closure, given the relatively high levels of competition in flexible packaging in North America with fragmentation remaining significant. We therefore do not envisage anti-trust issues to arise and stymie the deal. We believe the present value of synergies, after probability adjustment, to be worth nearly USD 1.9 billion after implementation costs. Taken together, the combined equity value of the business is just over USD 18 billion.

We note the market seems unconvinced synergies will eventuate per management’s guidance. Shares traded down 4%-5% down upon resumption of trade in Amcor around the AUD 14.60 level. By our estimates, the latest price implies around 35% of the total USD 180 million in synergies being realised--significantly lower than our synergy assumptions and overdone in our view.

We further note that this is a good deal for Bemis shareholders given the premium involved. That is, even under the scenario whereby no synergy benefits are realised, Bemis shareholders will see upside from the deal. We admittedly wonder to what extent sharper terms could have been struck by Amcor in the deal. Nonetheless, should 20% of synergies be realised, we estimate the deal would be value neutral, offering a fair amount of flex still available for Amcor to create value for its unconvinced shareholders as it strips out costs in excess of this relatively low hurdle.