News: AMC BREAKINGVIEWS-Packaging megadeal would have fragile finances

(Corrects fourth paragraph to show cost of capital relates to global packaging industry.)(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Alec Macfarlane HONG KONG, Sept 8 (Reuters Breakingviews) - A mooted megadeal in packaging looks financially fragile. Sydney-listed Amcor (AMC) is considering a takeover of U.S. rival Bemis , says Bloomberg. The strategic logic is offset by financing challenges and meagre prospective returns.

Amcor, which is based in Zurich and listed in Sydney, is an industry consolidator, boxing up 11 rivals since last year. In the Americas, it is keen to expand in flexible packaging products such as bags, foil and cling film. New York-listed Bemis would tick this box. It would also help Amcor gain more heft in Latin America, after last year’s $435 million takeover of South American rival Alusa, analysts at Jefferies say.

Financially, the case looks a bit less sturdy. Assume Bemis shareholders accept a takeover premium of 25 percent, or a total payout of $4.8 billion. Including net debt, Amcor’s outlay would be $6.3 billion, making this one of the biggest-ever deals in the sector.

BMO estimates operating income for next year at $440 million. If Amcor can strip out costs equivalent to 4 percent of sales, that would yield a return on acquisition of about 6.3 percent, a Breakingviews calculation suggests. That is exactly in line with the cost of capital in the global packaging industry, according to January estimates from Aswath Damodaran of New York University.

In valuation multiple terms, this also looks expensive. A $6.3 billion deal would give Bemis an enterprise value of 10.7 times next year’s EBITDA. This is pricey compared to the 9.2 times average for flexible and specialty plastic packaging deals done this year.

Then there’s the question of how Amcor would finance a takeover. Net debt stands at 2.9 times EBITDA, and funding a deal with debt would push that figure to more than 5 times, Jefferies analysts say. Keeping leverage below 3 turns is sensible in this industry, to avoid trouble in a downturn and to maintain an investment-grade credit rating. That means it will have to go through the more involved process of raising fresh equity to get this deal wrapped up.

On Twitter http//twitter.com/AlecMac11

CONTEXT NEWS - Sydney-listed food and industrial packaging company Amcor is considering a takeover of U.S. rival Bemis, Bloomberg reported on Sept. 8, citing people familiar with the matter.

- Amcor, which has a market value of about $14.6 billion, is working with advisers to explore a bid for Bemis, which has a market value of about $4.3 billion, the report said. The considerations are at an early stage and it is not clear whether Amcor has approached Bemis yet, it added.

- Bemis makes flexible and rigid plastic packaging for food, consumer products, medical and drug companies.

- “Amcor is continually reviewing opportunities to improve shareholder value and, as part of that process, regularly assesses a range of strategic options”, it said in a statement.

- Shares in Bemis rose 9.9 percent in U.S. trading to $46.90 a share. Amcor shares fell 0.9 percent by early afternoon in Sydney on Sept. 9 to A$15.57.

- For previous columns by the author, Reuters customers can click on [MAC/]

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Amcor considering potential takeover of rival Bemis Co –Bbg	

Amcor statement http://m.asx.com.au/m/announcements.xhtml?issuerCode=AMC Bloomberg article http//www.bloomberg.com/news/articles/2017-09-07/amcor-is-said-to-explore-takeover-of-packaging-maker-bemis BREAKINGVIEWS - Packaging veteran ticks right boxes for BHP

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