Amcor PLC Assigned 'BBB' Rating With Stable Outlook After Amcor Ltd.'s All-Stock Acquisition Of Bemis Co. Inc.

  • Global consumer packaging company Amcor Ltd. has completed its US$6.8 billion all-stock acquisition of Bemis Co. Inc. The merged company is known as Amcor PLC (collectively Amcor).
  • In our view, the enlarged group will benefit from an improved scale of manufacturing operations, solidify its market presence in existing jurisdictions, provide a more diversified geographical mix, and strengthen its profitability once Bemis is fully integrated.
  • On June 12, 2019, S&P Global Ratings assigned its 'BBB/A-2' long- and short-term issuer credit ratings to Amcor PLC, and its 'BBB' issue-level rating to the company's senior unsecured notes.
  • Post the acquisition, Bemis survives as a wholly owned subsidiary of the new holdings company Amcor PLC. We raised our ratings on Bemis to 'BBB' from 'BBB-' and removed them from CreditWatch, where we had placed them with positive implications on Aug. 6, 2018. We equalized the ratings on Bemis with those on Amcor PLC and view Bemis as a core subsidiary to the group.
  • We also affirmed our 'BBB/A-2' ratings on Amcor Ltd. We view Amcor Ltd. as a core subsidiary to the group.
  • The stable outlook reflects our view that Amcor PLC's global footprint in flexible and rigid plastic packaging, with its predominant exposure to stable end-markets, should provide a steady and predictable source of earnings. We expect the company to successfully integrate Bemis, grow group EBITDA margins, expand its product mix, and benefit from an enhanced scale of operations.
MELBOURNE (S&P Global Ratings) June 12, 2019--S&P Global Ratings today took the rating actions listed above. The issuer credit rating reflects our assessment of Amcor PLC's improved scale of manufacturing operations, solidifying market presence in existing jurisdictions where Amcor Ltd. has an existing presence, and our expectation that it will have a more diversified geographical mix and strengthen its profitability once it fully integrates Bemis. The acquisition results in combined pro forma revenue of US$13.4 billion in sales, US$2.2 billion in EBITDA, and free cash flow before dividends of about US$1 billion. The combined group will have approximately 245 facilities and 48,000 employees globally in more than 40 countries.
In our view, the existing operations of Amcor and Bemis are largely complementary and provide limited geographical overlap. The acquisition will combine Amcor's leading positions in Europe, Asia, and many parts of Latin America, with Bemis' leading positions in North America and Brazil. In particular, the flexibles packaging segment will have a more diversified and balanced spread of production facilities across these key regions. The acquisition will lift pro forma sales for the flexibles segment by 80% (Amcor PLC's pro forma sales of US$9 billion compared with US$5 billion for Amcor stand-alone), and will comprise 66% of the consolidated company's US$13.4 billion of sales. We expect the rigid plastics segment, on the other hand, to remain substantially the same as that of Amcor prior to the combination with Bemis.
Total sales revenue generated from rigid plastic packaging segment for the year ended June 30, 2018, is US$2.8 billion, representing 21% of total sales revenue.
We believe that through its enlarged global footprint, Amcor PLC will be better able to serve its global customer base and more efficiently allocate its overheads. Further, we expect Amcor PLC to benefit from the industry-leading commercial, operational, product innovation, and technological capabilities of the two companies.
We expect Amcor PLC's earnings profile to strengthen in the medium term, based on the synergy benefits that it will realize from the Bemis acquisition. Amcor can accommodate the increased debt levels (including US$1.3 billion of Bemis' debt and debt-like obligations as of fiscal 2018) within the rating level. We expect debt levels to gradually decline as Amcor uses free cash flow for debt repayment amid the absence of large debt-funded acquisitions. The operational synergies that will emerge from the Bemis acquisition, coupled with market growth, should assist in the generation of free cash flow.
We expect operational synergies to be substantial. Amcor anticipates about US$180 million of pretax cost synergies to occur over three years, representing approximately 4% of Bemis' fiscal 2018 sales. The synergies would be derived from procurement (about 40%), operations (20%), and general, administration and other (40%) segments. The group expects to realize US$65 million of synergies by the end of year one. We expect stronger EBITDA margins will emerge over the medium term. Nevertheless, we expect Amcor's margins to remain pressured over the next 12 months, given that Bemis' profitability has weakened in recent years.
While the company has yet to publicly articulate the combined group's financial policies, we believe Amcor PLC remains committed to retaining the 'BBB' long-term issuer credit rating. Amcor PLC's pro forma adjusted debt to EBITDA will be about 3.2x after the acquisition. Credit metrics are likely to improve from a combination of lower debt balances and higher earnings. We expect the ratio to improve to below 3.0x within the next two years as the company retains its focused product mix and makes progress in realizing cost synergies.
Post the acquisition, Amcor's shareholders will own 71% and Bemis' shareholders will own the remaining 29% of the combined company. Amcor PLC will be incorporated in the Bailiwick of Jersey in the Channel Islands and tax domiciled in the U.K. Amcor PLC will establish a primary listing on the New York Stock Exchange and will list on the Australian Securities Exchange.
The stable outlook reflects our view that Amcor PLC's global footprint in flexible and rigid plastic packaging, with its predominant exposure to stable end-markets, should provide a steady and predictable source of cash flow. We expect the company to successfully integrate Bemis' operations, and that the merger will improve Amcor's profitability, product mix, and scale of operations. For the 'BBB' rating, we expect the company to maintain an adjusted debt to EBITDA less than 3x, and sustain free operating cash flow to total adjusted debt above 15%.
We could lower the rating if the company's financial risk profile weakens materially as a result of debt-funded growth, higher-than-expected integration costs from its recent acquisitions or if global economic conditions deteriorate significantly. Such a weakening could occur if Amcor's adjusted debt to EBITDA stays above 3x for a prolonged period. We could also lower the rating if the company's financial policy becomes more aggressive, preventing any material deleveraging.
We could raise the rating if Amcor's business risk profile strengthens, such as by increasing its EBITDA margins as it successfully integrates the Bemis operations. Although of low likelihood over the next 12 months, upward rating potential could also occur if Amcor's credit metrics were to materially and sustainably improve. An adjusted debt to EBITDA staying below 2x supported by a more-conservative prudential policy would support an upgrade.
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