We view Amcor’s AMC proposed merger with Berry, a plastic packaging manufacturer, as value-neutral and maintain our fair value estimate of $17.80 per share. We expect the transaction to go ahead and incorporate our earnings expectations for Berry in our estimates for Amcor.

The all-scrip merger offers an approximate 23% premium to Berry’s last undisrupted closing price, using our fair value estimate for Amcor. The merger presents tremendous cost efficiencies and additional revenue opportunities from running the two businesses together. We estimate the firm will ramp up to USD 650 million in annual cost savings and additional revenue by the end of fiscal 2028, the third year after the merger. The firm’s last major acquisition, Bemis, in 2019, realized savings sooner and greater than initially guided, informing our confidence in current guidance.

We expect approximately half of the savings to be from cheaper procurement of raw materials for manufacturing. With roughly half of its manufacturing cost structure being resins, a small advantage in resin costs makes for a meaningful unit cost advantage, supporting our narrow-moat rating for Amcor. We anticipate the Berry merger will strengthen this advantage, with Berry likely to introduce new relationships with suppliers, and larger volumes from the combined businesses should lead to better sourcing agreements.

Our estimated weighted average cost of capital is unchanged at 7.9%. The merged company has similar gearing levels and is a very similar business with comparable exposure to cyclicality as Amcor.

At first glance, Berry appears to be very similar to Amcor, although we consider many of its products to be complementary to Amcor’s range rather than direct alternatives. This allows the business to cross-sell Berry’s range to Amcor customers and vice versa. Berry is a global plastic packaging producer with a number one or two market share position in most of its markets.

Amcor shares are currently trading at a 10% discount to our fair value.

Business strategy and outlook

Amcor’s strategy revolves around strategic acquisitions and divestments, market share growth, and investment in capacity and capabilities. We see several merits to its strategy, which has led to organic and acquisitive growth and average annual returns on invested capital of 17% over the five years to fiscal 2024, comparing favorably against a weighted average cost of capital of 8%.

Amcor strategically acquires and divests assets to drive long-term growth and enhance returns. The most recent significant acquisition was of global flexibles company Bemis in 2019 for USD 6.8 billion. The acquisition considerably increased Amcor’s North American exposure. About 40% of flexibles revenue is from North America, up from some 10% before the acquisition.

Margin growth is mostly from a mix shift in products. Certain segments, such as animal protein and medical, have higher margins due to greater complexity, tangible benefits, or less competition. However, contracts in the flexibles segment are generally short, at about two to three years, and about 30% are less than one year. We expect incremental margin improvement from higher-value customers as lower-value customers turn over, freeing up manufacturing capacity for higher-value customers. In the five years to fiscal 2023, we estimate average revenue growth from price and mix shift was 4%, compared with 1% growth from volume. Around one fourth of revenue in fiscal 2023 came from the higher-margin segments of healthcare, protein, hot-fill beverages, premium coffee, and pet food from an estimated one fifth five years earlier.

Due to the low value/weight ratio of plastic packaging, it is imperative to reduce the transportation of finished products to control costs. Amcor’s plants are strategically located near customers, particularly in the bulky rigids business. Here, Amcor’s plants are often next door and virtually integrated with the customer’s plant to reduce transportation costs. This encourages stickiness, as these customers sign longer contracts with Amcor and are more likely to renew them on expiration due to the entrenched nature of the partnership.

Amcor bulls say

  • Exposure to high-growth emerging markets balances low-volume growth in mature developed markets for products with similar or higher profit margins.
  • Amcor’s global production network enables improved scale-based cost efficiencies leading to improved margins and profitability and the ability to further consolidate fragmented or subscale markets.
  • A focus on product innovation and differentiation leads to increased market share of niche, high-value-added products, resulting in margin growth.

Amcor bears say

  • Amcor’s aggressive acquisition strategy has the potential for overcapitalization, overcapacity, and lower-than-expected cost synergies.
  • Packaging innovation can be replicated by competitors, decreasing margins, and reducing returns from Amcor’s focus on innovation and product differentiation.
  • Environmental concerns and potential plastics legislation can reduce demand for plastic-based products and increase costs in manufacturing greener alternatives.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.