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Rolling on, rolling ‘em Up’

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Global packaging titan Amcor continues to push ahead with its strategy of consolidating the still-fragmented packaging industry, last week announcing the purchase of a US-based preform manufacturer to bolster its Rigid Plastics business in North America.

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This deal comes on the heels of several other acquisitions over the past twelve months or so in locations as wide ranging as Brazil, China, India and South Africa.

Amcor announced the acquisition of privately owned Ohio-based Encon for consideration of US$55 million. According to Amcor’s statement, the American company generates annual revenues of approximately US$110 million servicing a range of customers, including some existing Amcor customers and others in the beverage, food and household sectors.

Encon is a preform manufacturer and operates from four manufacturing sites, with the majority of preforms manufactured at the largest plant in Dayton, Ohio, with other sites in Hawaii, Texas and Washington. Encon will be folded into Amcor’s Rigid Plastics business group, further scaling that business up. According to Plastic News most recent ranking, Amcor is already North America’s second largest blow moulding group.

The Amcor statement described Encon as being “well capitalised” and that the acquisition is “expected to reduce future capital requirements for Amcor’s existing Rigid Plastics business.”

The top honcho at Amcor, Ron Delia said of the deal: “This acquisition provides an excellent opportunity to acquire a well-capitalised business at an attractive price. Given the manufacturing overlap, the acquisition will deliver considerable operating synergies and generate strong returns for shareholders.”

As mentioned above, the Encon deal comes on the heels of a number of others over the past twelve months. Briefly these included the acquisition in India of Packaging India Private Limited (PIPL) from Essel Propack for US$26.4 million in July, a Brazilian deal announced in April to buy Souza Cruz’s internal tobacco packaging operations in Cachoeirinha, Rio Grande do Sul for an effective purchase price of around US$30 million and finally, the acquisition of Nampak Flexibles for US$22 million.

This latter deal was Amcor’s first in that part of the world and will provide a platform for growth in the African region. All deals look reasonably priced based on the information disclosed.

Amcor’s balance sheet is in good shape, with net debt to EBITDA sitting at around 2.0 times and EBITDA interest cover of over 8 times. Given a resilient business model, with customers operating in a number of defensive industries the company has ample scope to continue making selective acquisitions.

Management provided a (very) brief trading update for the first quarter at the recent AGM, and it sounds very much like business as usual. Overall, the company anticipates that earnings this financial year will be higher on a constant currency basis than in FY15.

As Amcor is now reporting in US dollars, the strong greenback was headwind last year, but when it came to dividends in the Aussie currency it was a bonanza for shareholders. As can be seen in the below table, reported EPS increased just 0.4%, but was up 7.2% on a constant currency basis. The dividend per share in US currency increased just 2.0%, but in Australian cents it increased 23.3% to 53 cents per share.

Amcor ticks a lot of boxes in terms of quality, as it is a leader in innovation, has scale, and a strong balance sheet provides it with firepower to bolster organic growth via acquisitions. If our view that the Australian dollar stands to lose more value plays out as expected, this will also mean a higher dividend for Aussie shareholders going forward.

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