With its stunning May 8 announcement that it plans to acquire Schmalbach-Lubeca AG's plastics business, Melbourne, Australia-based Amcor Ltd. finds itself thrust into the lead slot globally for PET containers and plastic closures.
Now comes the hard part.
The company faces a market that's growing but hungry for new technology to keep it refreshed and expanding into new applications. Meanwhile, price pressures remain, especially when new PET containers bump against metal and glass competitors.
``The key focus is on advancements in technology and materials for PET,'' said Brian Larsen, vice president and general manager of food and beverage products for competitor Owens-Illinois Inc., based in Toledo, Ohio. ``You have to make PET a viable choice when people are choosing materials.''
Amcor's deal surprised both analysts and competitors. The publicly traded company will pay A$2.918 billion (US$1.57 billion) for Schmalbach's PET container and plastic and metal closures business. The deal will be financed through a combination of new shares, convertible securities and proceeds from a previously announced sale of Amcor's stake in tissue maker Kimberly-Clark Australia.
But the biggest figure could be 51: That is the number of PET container plants that Amcor will own worldwide, much more than the 18 it currently owns. Schmalbach is a market leader in North America, Latin America and Europe.
Ratingen, Germany-based Schmalbach, majority owned by a German financial group and utility company, wanted to sell its noncore packaging assets and gain a healthy investment return, according to several sources familiar with the sale. It will receive 6.7 times its earnings before interest, taxes, depreciation and amortization.
``Schmalbach was on the block for awhile,'' said Ghansham Panjabi, equity analyst with Lehman Bros. in New York. ``It was a good growth business, but Schmalbach had struggled to reach a certain amount of critical mass.''
Schmalbach had been talking with Amcor since December, said equity analyst Simon Archer of Merrill Lynch & Co. Inc. in Sidney, Australia. Amcor chose not to buy Schmalbach's separate metal beverage can business.
The deal is scheduled to close by July.
``They did six weeks of due diligence and looked at 21 plants,'' said Archer, who follows Amcor. ``At the end of the day, they found that Schmalbach was a good stand-alone business that had little geographic overlap with Amcor's plants. They decided to go ahead and become the No. 1 PET player globally.''
Amcor expects a return on its investment within three years, Archer said. To do that, it needs for earnings to grow 9 percent per year. Amcor has not announced any plant closings, and Archer said none are in the works.
But achieving a healthy return could take patience, Panjabi said. While the PET business is growing, high equipment costs historically have cut into earnings at many companies, he said.
``It's a very capital-intensive business,'' Panjabi said. ``It takes huge pieces of equipment to get these bottles made. It's difficult to return the cost of capital very quickly.''
Amcor will have a size advantage to do that. Post-acquisition, Amcor claims it will command 12 percent of the worldwide PET bottle market, with the next-closest competitors reaping 4 percent of that business.
In closures, Amcor picks up Schmalbach's share of White Cap LLC, a joint venture with Silgan Holdings Inc. of Stamford, Conn. Amcor already has a closures venture with Bericap Group Inc. of Dijon, France. Amcor did not say whether the operations would be integrated.
Amcor also gains a major foothold in the United States. Schmalbach-Lubeca Plastics Containers U.S.A., a Manchester, Mich., unit, ranks as North America's fourth-largest blow molder, according to Plastics News data. Schmalbach also is one of Europe's largest PET container companies.
Amcor, with its regional PET packaging operations in Mississauga, Ontario, ranks 17th in blow molding in North America, while its CNC Containers Corp. unit in Tumwater, Wash., was right below it at 18th.
``The purchase makes absolute sense and is consistent with Amcor's public statements on what markets it wants to play in, what type of player it wants to be and the financial discipline it will exercise to get there,'' said Ken Brooks, a Montreal-based vice president with Ernst & Young who follows the plastics and packaging industries. ``It is an entity-transforming transaction.''
While officials with Amcor and Schmalbach were unavailable for comment last week, several PET sources said that technology and product innovations must continue for the industry to maintain its head of steam.
After more than a decade of double-digit growth, the PET container market will grow at a somewhat slower, 9 percent annual rate until 2005, according to Amcor's estimates. Technology advances will drive some of that growth, said Mike Hoffman, president of the Constar Inc. PET container unit of Philadelphia-based Crown Cork & Seal Co. Inc.
On the commodity side of the business, including carbonated soft drink and water bottles, competition and capacity expansions during the past seven years have cut into profit margins. But that segment is starting to tighten in capacity, Hoffman said
There is potential in the commodity business for growth, Hoffman said. The market for small, multipack bottles - a growing area - could be driven by new carbon-dioxide barrier technologies that lead to longer shelf life, he said.
``On the custom side of the business, growth comes from the ability to package juices and teas in single-serve sizes,'' Hoffman said. ``That requires oxygen-scavenger technology.''
That technology could help make those bottles more affordable, avoid discoloration and exceed shelf-life requirements. Several firms, including Amcor and Crown Cork, have focused research on scavenger products.
Amcor and Schmalbach have technologies in barrier PET custom bottles that could be enhanced by the acquisition, said Ronald Schotland, president of Schotland Business Research Inc. in Skillman, N.J.
Both companies also have been developing PET beer bottles and containers with recycled content, Schotland said.
``With their knowledge of multilayer barrier PET containers, both companies have demonstrated innovations, especially with plastic beer bottles,'' Schotland said. ``And each brings something to the party when it comes to recycling. I expect that synergies will result from this sale.''
Both Larsen and Hoffman said they expect further consolidation in the PET container industry.
Scott McCarty, spokesman for container maker Ball Corp. of Broomfield, Colo., equated the PET market with that for metal cans 20 years ago.
``There were a couple dozen can makers then, and now we have about four companies [in North America],'' McCarty said. ``The PET container industry is still very fragmented. Consolidation makes a big difference in realizing price increases for PET.''
New products, including a bevy of new shapes, sizes and graphics for PET bottles, could help blow molders achieve growth, McCarty said. The lightweight size and unbreakable body of PET bottles have fueled many conversions from glass during the past few years, he said.
``We see a lot of activity in different sizes of PET bottles, especially for small servings,'' McCarty said. ``PET bottles are starting to run through standard vending machines in 10-ounce sizes shaped with a few modifications. You have the convenience factor with new PET bottles.''
Ball also is rolling out new PET beer bottles, sold in San Francisco stores by Anchor Brewing Co. for its Anchor Steam brand, McCarty said.
Yet McCarty said plastic is a few years away from making a significant penetration in the North American beer industry, McCarty said. Fans who pelted fields at several football stadiums last year have set back that cause somewhat, he said.
Recycling also remains an issue in the PET bottle market, pushed by large customers such as Coca-Cola Co. Amcor recently said it would construct a bottle-to-bottle recycling system in Mississauga and at several other plants.
The company also is working on new multilayer bottles that increase the longevity of juices on store shelves, Archer said. Amcor has a leg up on some competitors with its technology, he said.
``We've seen significant growth from a lot of major companies in PET,'' Archer said. ``But some of them are running their business more for cash and not wanting to reinvest in technology. Schmalbach and Amcor are happy to reinvest and are in a better position than some to do it.''