Australian packaging giant Amcor Ltd. is restructuring its global operations. The Melbourne-based company wants to sell its PET blow molding business in Europe, while focusing on faster-growing markets like custom PET containers in North and South America.
Its European PET business is officially for sale, the company announced Feb. 20. Chief Executive Officer Ken MacKenzie said the firm expects to sell the business within six months.
A private-equity buyer seems most likely, according to Australian and North American-based analysts and consultants. Buying the unit, which has sales of about 500 million euros (US$656 million), is a good way for a private-equity player to get a platform in that market, said Ken Brooks, senior vice president of Ernst & Young Orenda Corporate Finance Inc. in Montreal.
``Europe is a very different animal,'' Brooks said, because of the stiffer competition there in carbonated soft drinks and water. ``It's a tough market in terms of getting value for packaging assets. I just don't see another trade buyer willing to step up.''
Packaging analyst Ghansham Panjabi of Wachovia Securities LLC in New York said packaging suppliers are under pressure to boost their core businesses and divest underperforming assets.
``We believe a private-equity firm or a strategic player such as Graham Packaging [Co. LP of York, Pa.] would be the most logical buyers,'' Panjabi wrote in a Feb. 22 research note. ``But given the recent management shake-up at Graham, the company is more likely to focus on restoring profitability rather than near-term growth.''
MacKenzie said Amcor's European PET business is profitable and well-run, but the market there is changing.
``The Western European markets require further consolidation and this needs to happen sooner rather than later,'' MacKenzie said. ``Amcor could have decided to be a leader in this process, and given our strong global position, this was something that we considered seriously.
``In the end, it was agreed that the opportunities for growth and returns in the Americas were such that it was not possible to undertake a consolidation strategy in Western Europe at the same time.''
The firm is not yet negotiating with potential buyers for those European businesses.
``Amcor has just issued an information memorandum and it's a process that is likely to take several months,'' said Amcor spokesman John Murray.
``There could be industry participants and private-equity players interested. The industry players will be interested because Amcor is the No. 1 player in PET packaging in Europe,'' he said. ``It is clear there is private-equity money out there, but there are some industry participants that might be interested in consolidation of that market.''
Murray said the company expects to get as much as A$580 million (US$458 million) for the business.
But Charles Macgregor, senior credit officer and lead analyst at Moody's Investors Service Pty. Ltd. in Sydney, Australia, said he expects a private-equity player to pay A$300 million to A$400 million (US$237 million to US$316 million).
Macgregor said it is too soon to tell whether Amcor's decision to sell the European PET businesses is a smart one.
``They have made a call that it will be difficult to grow that business [in Europe] in the medium term,'' he said. ``With any of these decisions, there are always questions on whether it is the right or the wrong move and whether it is the right time. The strategy sounds right, but execution is another thing. They still have to sell the businesses and invest the money in other operations.''
Murray said Amcor chose to invest in its North American custom hot-fill operations, rather than buy more PET businesses in Europe, because there is more growth potential and a higher barrier to market entry in North America, due to the technology required.
MacKenzie said Amcor has experienced volume decline in its first-half results for North America because Coca-Cola Co. decided to manufacture bottles itself, which led to some plant closings in Canada. A contract for 800 million containers ended in early 2006, and Amcor closed plants in Vancouver, Montreal and Calgary.
But a lucrative contract with PepsiCo Inc. has led to a new plant in Wytheville, Va., where Amcor will start production in March, making 1 billion bottles per year.
In technology developments, PowerFlex, Amcor's new technology for panel-less hot-fill bottles with a glass-look finish, is targeted toward more niche, premium-product manufacturers that did not previously use plastic bottles.
Amcor spent A$29 million (US$23 million) on equipment for custom PET manufacturing in North America during for the first half of its current fiscal year, including for the Wytheville plant and PowerFlex-related investments in existing North American plants.
Shelley Steele, marketing and communications director for Amcor PET Packaging in Ann Arbor, Mich., said capacity for PowerFlex will be added in the second half of 2007 on the West Coast.
``Custom PET remains an attractive business,'' Amcor CEO MacKenzie said. ``The custom business is demanding, and there are only few players with the experience and track record in this segment. It continues to exhibit strong growth and Amcor is clearly a market leader. In the [carbonated soft drink] and water segment in North America, industry discipline and improving capacity utilization has delivered improvements in pricing and returns over the past few years. The overall operational performance of this business is excellent.''
Still, its North American blow molding operations aren't without struggles. In Mexico, for example, Amcor is closing a blow molding plant this month in Saltillo, and in the past calendar year shuttered two other blow molding plants in that country.
Elsewhere in the company, growth segments now include flexibles and tobacco packaging in emerging markets. MacKenzie said that translates into a newly constructed flexibles plant in Poland to serve Eastern Europe, and a new tobacco packaging plant in the Ukraine.
The changes are part of Amcor's ``Way Forward'' agenda, a program implemented 18 months ago. For the flexibles business, that means a smaller number of more-focused plants, lower costs and improved capacity utilization.
Moody's Macgregor said Amcor's management team has ``learned a lot'' in the past 18 months, resulting in the decision to sell the European PET businesses. He said it is likely Amcor will take a similar line with its flexibles businesses.
Murray said competition from China is putting pressure on Amcor's flexibles business. A review of that business in Europe will be announced in April, and may result in further restructuring and closures.
Macgregor said MacKenzie's three-year plan to improve profit so far rates ``six or seven out of 10.''
Craig Parker, Standard & Poor's primary credit analyst in Sydney, said the outlook for Amcor is unchanged since S&P dropped its credit rating to BBB more than a year ago.