Amcor's new package ticks all the right boxes

In the context of Ken MacKenzie's highly successful strategy, a demerger of AAPD is the sensible next step towards future growth.

Amcor’s Ken MacKenzie has unveiled a demerger that is logical in both its concept and its timing.

While it may not be as obvious as it was with Brambles, which recently announced the demerger of its Recall information management business from its core Chep pallet operations, the evolution and transformation of Amcor since MacKenzie’s elevation to chief executive in 2005 has produced two quite separate sets of business.

There is the core and ongoing Amcor which, on the back of a series of beautifully timed and executed acquisitions and $1.4 billion of disposals, has emerged as the global leader in rigid plastic containers, food flexibles, healthcare flexibles and tobacco packaging.

There is also the discrete Australasia and Packaging Distribution business, which is the market leader in this region in beverage cans, the number two player in glass wine and beer bottles and fibre packaging and a big player in the North American packaging distribution segment. It is that AAPD business that Amcor intends to demerge.

The hallmark of the MacKenzie era has been a focus on winning leadership positions within a focused portfolio, exiting segments of the packaging industry outside Amcor’s narrow range of preferred businesses while using big acquisitions – most notably the Alcan Packaging acquisition during the financial crisis – to gain and consolidate leadership positions.

It has been an exceptionally rewarding strategy for shareholders, with a compound annual growth rate in earnings before interest and tax of 21 per cent over the past five years.

The AAPD division has been through the same transformative journey as the rest of the group, albeit that its changes relate more to divestments, plant closures and restructuring than acquisitions. MacKenzie inherited 65 plants. Today the division has 26.

While Amcor has invested heavily in the division – it has pumped in about $1 billion, including a $500 million investment in a new recycled paper mill – and taken some big hits as it has restructured, the benefits have yet to be fully realised.

The business may not have quite the same sizzle and growth as the global Amcor, but there are about $68 million of cost savings that will flow over the next couple of years from the decisions already taken and Mackenzie is quite optimistic about its growth potential.

Amcor, because its full-year results won’t be tabled until August 19, wasn’t able to provide current financials for the AAPD business, which generates something approaching $3 billion a year in sales and is thought to be worth something above $2 billion.

Interestingly, Amcor didn’t consider a sale of AAPD and isn’t running a ‘dual track’ process, presumably because it believes there will be significant near term upside for its own shareholders if it gives them a continuing interest in AAPD.

The demerger, on terms also yet to be announced, will result in two more focused entities, both listed and headquartered in Melbourne despite the fact that 95 per cent of the continuing Amcor group’s earnings are generated outside Australia. Given that most of its shareholders are Australian, that makes sense.

The history of demergers does indicate strongly that they create value, both for the continuing core and the businesses spun-out, which is presumably a result of the extra focus and the independence given to the demerged entity to make its own capital allocation decisions.

AAPD was put together as a discrete business four years ago. While the combination of the North American packaging distribution businesses and the Australasian operations might appear odd at first glance, they are both pursuing the North American packaging distribution model, where Amcor manufactures corrugated boxes and distributes them but also sources and distributes third party packaging.

While both the core Amcor and AAPD are packaging businesses, they operate in quite different segments of the industry, in different regions and have different returns profiles.

The ongoing Amcor is a high-margin set of businesses with strong growth characteristics where AAPD has a lower margin set of products and a lower growth profile, although it is quite a strong cash generator and has a stable underlying earnings base that will be increased by what MacKenzie terms its “self-help” measures, or cost savings.

It is the near-completion of the rationalisation, restructuring and investment phase for the AAPD businesses that makes sense of the timing and the differences in the nature of the two suites of operations that explains the rationale for the demerger, which Amcor expects to complete before the end of the year.