The market loved the move by Amcor (AMC) to join the corporate divorce club and try and unlock value by splitting itself in two.
The company announced yesterday that it was spinning off its $2 billion Australasian and US packing business (cans, bottles and cartons) into a separate listed company. In fact the new company operates in seven countries and has 76 plants.
The Australasia and Packaging Distribution unit, which had $2.77 billion in revenues in 2011-12, should be listed as a separate business by the end of this year after shareholders vote and approval from the courts.
In embarking on this course, Amcor joins other companies in splitting themselves up – Brambles is selling its Recall document handling and storage business, Fosters sold its wine business which is now Treasury Wine Estates and struggling with a multi-million dollar headache in the US News Corp split itself into 21st Century Fox which is a content business and the weak analogue print business (with Australian Pay TV) called News Corp.
Tabcorp split itself into casinos (Echo) and left the wagering business with it and Westfield split itself into Westfield Group with all the malls in Australasia, leaving the European, US and UK malls in the parent company.
Earlier Boral spun off Origin (and has under performed its child) and CSR spun off Rinker Group (mostly based in the US which was taken over in 2007 by Cemex the big Mexican building products group which then almost collapsed because of the depression in US housing caught it with too much debut and not enough income).
And BHP Billiton spun off its steel business into two companies which became BlueScope and Arrium. Rio Tinto is trying to spin off or sell a multi billion collection of old and poorly performing aluminium and associated businesses, without any success, and it failed to sell its diamond business recently.
Macquarie has looked at 29 splits since 1995 and found that the spinoff typically starts life weakly and the share price underperforms, but does better in the second and subsequent years.
The news yesterday of Amcor’s planned move sent the shares to their highest level since 1968 – $11.17. That was up 5%, before they dipped in the afternoon sell down to end up 14c or 1.4% at $10.74.
AMC 1Y – Amcor to spin off distribution arm
The spin off is likely to have an initial value of$1.6 to $2 billion and will leave the rest of Amcor with a market capitalisation of more than $10 billion, perhaps $11 billion, which shouldn’t impact its index weighting.
Amcor Directors said in yesterday’s statement that they "are of the view that the demerger will enhance shareholder value by enabling each company to better pursue their own growth agendas and strategic priorities".
Amcor CEO and managing director Mr Ken MacKenzie said: “To be a successful market leader, that delivers continuous improvement in customer value, a company must be focused in terms of product portfolio and end markets.Although Amcor and AAPD are both packaging companies they are actually very different in terms of product segments and geographic focus.
"Amcor has global leadership positions in the flexibles and rigid plastics segments, while AAPD operates in the fibre, glass and beverage can packaging markets in Australasia and packaging distribution in North America and Australia.Over the past six years, Amcor has invested significantly in AAPD to improve its manufacturing capabilities and ensure it is well positioned for growth.
"These investments have been in excess of $1 billion over that period and include the new recycled paper mill at Botany, a new furnace at the glass bottle plant at Gawler and a new beverage can line in New Zealand. AAPD will continue to benefit from these initiatives in terms of earnings and cash flow.”
So what does the market think. One unnamed analyst suggested that NZ raider Graham Hart should be watched as packing is an area he has expanded into in recent years with the purchase of Alcoa’s packing group in 2008 for $2.7 billion. It’s now called Reynolds Packaging.
Other analysts reckon the group might struggle to get a full value from the local market without further expansion (create a smaller Amcor?).
Since 2009 Amcor’s total shareholder returns have been 185% – the shares have risen 135%, compared with a 30% rise for the ASX 200.
