EUR 850.00 For Business Accounts Only

Morningstar | Bemis Shareholders Have Plenty of Upside Thanks to Amcor's Generous Offer; Raising FVE to $59

After reviewing the details of Amcor's offer to purchase Bemis in an all-stock deal, we believe that Bemis' shareholders stand to benefit meaningfully. Amcor is poised to issue 5.1 Amcor shares for every Bemis share held, with the deal slated to close in the first quarter of 2019. Versus our prior $49 per share fair value estimate, Bemis shareholders would see upside from the deal even if Amcor in unable to realize a single dollar in synergies, due to the deal premium alone. However, we also expect $126 million in annualized synergies by 2021 and we assume a near-certain likelihood of deal closure. Accordingly, we've raised our Bemis fair value estimate to $59 per share from $49, but we've left our narrow-moat rating in place.

We believe a combined Amcor and Bemis should realize roughly 70% of management's stated $180 million synergy target. There should be little issue realizing the targeted $72 million in back-office cost reductions, thanks to regional and global administrative consolidation. We estimate only a 50% capture of both operational savings ($18 million) and procurement synergies ($36 million). As Bemis and Amcor trim overlapping capacity, operating rates should rise and overhead costs should fall, just not quite as meaningfully as management has guided. The stated $72 million in procurement synergies seems unlikely, given that both businesses are already buying substantial volumes of their input materials.

Strategically, the deal makes sense. Following years of subdued volume growth for consumer packaging goods firms in developed markets, Bemis has struggled to improve profitability. A combined Amcor and Bemis should improve the scale of both firms' flexible packaging footprints and help reduce areas of industry overcapacity.

Our $59 per share fair value for Bemis builds off our standalone valuations for both Amcor and Bemis, plus the present value of estimated synergy realizations. We previously valued Amcor at $15.8 billion and Bemis at $5.9 billion. We expect $126 million, or 70% of targeted synergies, to be realized by 2021, following $150 million in implementation costs per management's guidance. In our base case, we assume a near-certain likelihood of deal closure, given the relatively high levels of global competition in flexible packaging. We believe the present value of synergies, after probability adjustment, to be worth roughly $1.9 billion. Taken together, the combined value of the business is just below $23.6 billion. Amcor has disclosed that Bemis will own 29% of the combined entity after share issuance, leaving 71% to current Amcor shareholders.

Our scenarios have also been updated to reflect varied deal outcomes. In our bull case, we assume the deal will close and we increase our synergy realization estimate to 80% of target, or $144 million in aggregate. This takes our bull-case fair value estimate to $76 per share. In our bear case, we drop our probability estimate of deal closure to 75% and leave our original $126 million in estimated annualized synergies in place. This brings our fair value estimate per share to $44.