We recommend narrow-most Amcor AMC shareholders vote in favor of its proposed merger with Berry at the extraordinary general meeting on March 4, 2025.  

We view the merger with Berry, a plastic packaging manufacturer, as value-neutral. Amcor’s all-scrip offer is at an approximate 21% premium to Berry’s last undisturbed closing share price, based on our unchanged fair value estimate of $17.80 per share for Amcor. Amcor’s board of directors unanimously recommends Amcor shareholders vote for the proposal, and we think it is highly likely to be approved by both Amcor and Berry shareholders.

While we have made minor adjustments to our model based on additional information provided in the merger prospectus, they are immaterial to our fair value estimate. These include one-off cash costs of about USD 60 million and USD 30 million over fiscal 2025 and 2026, the preceding and first year of the combined entity, respectively. Nonetheless, we expect tremendous synergies from the merger. We estimate the firm will ramp up to USD 650 million in annual cost savings and additional revenue by the end of fiscal 2028, three years after the merger is likely to complete. After its last major acquisition, that of Bemis, in 2019, Amcor realized savings earlier and larger than initially guided, informing our confidence in current guidance.

We also now forecast higher interest expense than previously. Amcor’s debt is to effectively double after combining with Berry. While the firm seeks more favorable terms in refinancing Berry’s debt that it will assume under the merger, it must incur bridging finance at a cost of almost 11% per year. However, with several months until the transaction is expected to complete in mid-2025, we expect this to be partially offset by Berry further reducing its debt. We also think Amcor will likely be successful in securing better terms when it refinances this debt.

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.

Moat rating

We think Amcor’s scale as the largest global provider of plastic packaging and transportation benefits from proximity manufacturing with customers, providing a durable cost advantage.

Amcor is the largest global provider of plastic packaging, with operations in 37 countries. In its main geographies of North America, Europe, Latin America, and Asia, the next-nearest competitor has less than half as much market share. With roughly half of its manufacturing cost structure being resins, a small advantage in resin costs makes for a meaningful unit cost advantage. We estimate large-scale players enjoy better terms with the petrochemical industry than smaller competitors. Our analysis indicates Amcor’s advantage in total manufacturing costs—and thus improved gross margins relative to nonscale players—drives its higher ROICs above its weighted cost of capital of 8% over our forecast period. ROIC, including goodwill, averages 12% over our forecast period to fiscal 2034.

We also think Amcor has a cost advantage from lower transportation costs relative to peers. With transport costs particularly onerous for commodity thermoplastics once processed, geographic proximity to customers’ manufacturing sites is imperative. We estimate about one third of revenue is exposed to a transportation cost advantage from embedded customer manufacturing. This is where Amcor establishes a plant very close or adjacent to the customer. Generally, the two plants are practically connected to allow low-cost transportation of products. This applies to most of the rigids business and some of the flexibles business. The contracts for these arrangements are longer, at about seven years compared with two to three years generally. These relationships also create stickiness and have a much greater likelihood of renewal at the end of the contract period. At renewal, we believe Amcor has the negotiating power because it owns the closest plant to the customer and can offer the lowest price contract due to lower transportation costs than a competitor without a proximity benefit.

In rigids, this is cost-effective because transporting empty plastic bottles adds extra costs. Hence, we estimate most rigids customers have on-site arrangements, including Amcor’s largest rigids customers, Pepsi and Coca-Cola.

In flexibles, on-site manufacturing is practical when a customer requires a large volume of highly specialized packaging products, such as Nespresso pods, and the firm can justify running a plant solely for this customer’s needs. We estimate about one fifth of flexibles revenue is exposed to such arrangements.

A secondary transportation advantage is due to the firm’s scale providing proximity to customers. In the largest geography of North America, Amcor has 24 rigids plants, with industry-leading asset productivity and unit cost positions. In the North American flexibles business, Amcor has 33 plants, in addition to three for specialty cartons (cigarettes) and one for capsules (coffee pods). Fifteen plants are strategically located close to customers in Wisconsin, including Nestle and Kraft Heinz. Its market share in North America flexibles is more than twice that of the nearest competitor.

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.