Amcor Ltd., Australia’s largest packaging company, offered to buy part of Rio Tinto Group’s Alcan packaging unit for $2.03 billion to become the biggest supplier of drug and healthcare packets.
Amcor will get the global pharmaceuticals and tobacco packaging as well as the Asian and European food packaging units Rio acquired in its $38 billion takeover of Alcan Inc. in 2007. The offer will be funded by a A$1.6 billion ($1.3 billion) share sale and bank debt, Melbourne-based Amcor said in a statement.
The takeover, Amcor’s biggest, will boost sales by 50 percent and may arrest two years of declining profit. It will make Amcor the world’s largest supplier of global pharmaceutical, healthcare and personal care packaging, and the biggest supplier of tobacco packaging to Europe, according to Deutsche Bank AG.
“It looks like a well-negotiated deal from the Amcor board and management and funded fairly conservatively,” Nomura Holdings Inc. credit analyst Ben Byrne said in an e-mail. The cost of buying Amcor credit-default swaps fell to 115 basis points from 130 after the news was announced, Nomura prices show.
Standard & Poor’s Ratings Services today placed its long- term ‘BBB’ rating on Amcor on credit watch with negative implications. The rating is likely to be affirmed with a stable outlook if the share sale is completed as planned, Standard & Poor’s said in an e-mailed statement.
Amcor is paying between 5.5 and 5.7 times the units’ adjusted earnings before interest, tax, depreciation and amortization for the last 12 months, Managing Director Ken Mackenzie said in the statement.
Bemis Co. paid 6.7 times earnings before interest, tax, depreciation and amortization for Rio’s Food Americas business last month, Citigroup Inc.’s Sydney-based analyst Clarke Wilkins said in July 6 note to clients.
“It’s a pretty good price,” said Jason Beddow, chief investment officer at Argo Investments Ltd., an Adelaide-based investment company with a market value of A$3.7 billion. Argo holds more than 5 million Amcor shares, according to data compiled by Bloomberg. “Everyone’s always talked that packaging needs further consolidation; that’s structurally probably a positive as well.”
Amcor’s shares, which are halted, have declined 2.6 percent this year. Rio, the world’s third-biggest mining company, dropped 0.4 percent to A$56.90 at the 4:10 p.m. Sydney time close on the Australian stock exchange.
“Now is the right time in the economic cycle to be making acquisitions as asset values are substantially lower than they have been for many years,” Mackenzie said in the statement.
The company’s previous biggest purchase was the $1.5 billion takeover of the PET bottling and container lid business of Germany’s Schmalbach-Lubeca AG in 2002.
London-based Rio has agreed to a period of exclusivity with Amcor and will respond to the offer after consulting with the relevant European works councils, it said in a statement today.
“Amcor’s offer is in the interests of all stakeholders,” Rio’s Chief Financial Officer Guy Elliot said in the statement. It’s seeking to sell non-mining assets to cut debt that ballooned 19-fold after it bought Alcan.
Rio has also raised $2.5 billion this year from selling iron ore and potash assets in Latin America, a U.S. coal mine and a share in a Chinese aluminum smelter. It has had $6.6 billion of asset sales in the last 18 months, Rio said today.
Amcor will add T.G.I. Friday’s Skillet Meals and Sheba petfood to its existing packaging products, which include the packaging for Fisherman’s Friend throat lozenges and Gatorade sports drinks. It manufactures cans, plastic bags, icecream wrappers and sterile surgical instrument trays.
The final purchase price will be between $1.85 billion and $2.125 billion depending on adjusted LTM EBITDA at the time of closing.
Amcor, which today said full-year net income dropped 18 percent to A$211.7 million, will sell shares on a four-for-nine basis at A$4.30 a share, it said. The purchase may generate savings of between A$200 million and A$250 million by the third year of ownership, Amcor said in a presentation today.
“Alcan Packaging remains the most obvious solution to Amcor’s growth challenge, given the neat strategic and growth aspects that it would bring,” Royal Bank of Scotland Group Plc analysts said in a note dated yesterday.
Amcor is the world’s largest producers of PET packaging and the unit accounted for 34 percent of sales in the year ended June 30. The flexibles unit, which manufactures packaging for food, hospital sterilization units and tobacco, was the second biggest earner in the year.
The share sale is underwritten by Commonwealth Bank of Australia, Deutsche Bank AG, JPMorgan Chase & Co., Bank of America Merrill Lynch and UBS AG. Amcor is being advised by UBS and Goldman Sachs JBWere Pty.
The acquisition requires approval from antitrust and competition authorities in the U.S. and the European Union. Rio’s consultation with the European Works Council is expected to take “several months,” Amcor said today.
Credit-default swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails meet its debt agreements. An increase suggests deteriorating perceptions of credit quality and a drop shows improvement. A basis point is 0.01 percentage point.
— With assistance by Madelene Pearson in Melbourne and Brett Foley in London. Editors: Andrew Hobbs, Keith Gosman
August 18, 2009 © Copyright: Bloomberg