On December 18, 2013, a new company debuted on the Australian Stock exchange – well, sort of a new company. Orora Group Limited is something of a clone of Amcor as it was about 30 years ago (1984 to be precise) when it formally transitioned its company name from Australian Paper Manufacturers Limited to APM Limited to reflect its increasing packaging focus. The APM corporate identity was temporary and morphed to become Amcor Limited in 1986. The rationale for demerging Orora Group from the Amcor of today is to allow both companies to focus on their core competencies and thereby unlock the intrinsic value of the assets.
APM Limited evolved from the acquisition by Australian Paper Manufacturers Limited of Containers Limited in 1981, which had a focus on metal cans (using technology from Continental Can, which remained a key stakeholder until 1982) but growing interests in plastics and fiber packaging.
The post-merger Amcor will still be a world leader in packaging, but primarily in the flexible and rigid plastic sectors, which will operate as separate business groups. The Flexibles Division is significantly the largest with revenue of about $6.4 billion, 121 manufacturing plants operating in 35 countries with about 21,000 personnel. The Rigid Plastics Division operates principally in the Americas and has revenue of about $3.1 billion, 61 manufacturing plants in 13 countries and about 6,000 personnel. 34% of Amcor’s revenue comes from Western Europe, 31% from North America, 29% from emerging markets and only 6% from Australasia.
Although its products are mainly paper-based, in the demerger details is the fact that Amcor will still operate the tobacco packaging business, which is significant and growing in many emerging markets, as one of three operating divisions within the Flexibles Division. This has been a strong business for Amcor, delivering 22% of Flexibles revenue and due to its internationality will continue as part of Amcor. Tobacco Packaging has 23 manufacturing plants in 19 countries employing more than 3,500 co-workers. As a consequence, Amcor will probably continue to be a stock that is not supported by many so-called ethical investors. Those investors may, however, now be unshackled to be able to invest in Orora.
Amcor’s strategy is growth oriented. It will remain headquartered in Australia, but with only 6% of its revenue earned in Australia and likely to decline as a consequence of its strategy, it is inevitable that its operational base will increasingly reflect its global presence. For the moment with a majority of its investor base in Australasia it will at least remain notionally an Australian company.
There are of course differences in the Orora of today and the Amcor of 30 years ago. For a start, a significant chunk of its business (about one third) is its packaging and distribution division in the USA, the acquisition of which in 1989 was the catalyst for Amcor’s transition into an international packaging giant. The steel can business that was such a significant component of Containers Limited had been previously divested but Orora has a significant aluminum can beverage business at which it excels. Then there is the glass bottle business which was not a part of the business portfolio until a decade ago. Previously, a company that is now owned by Owens-Illinois was the sole provider of glass to the Australian market. The Orora facilities cleverly cherry-picked what was then a rapidly growing market for wine bottles. Orora now has 50% of that market plus the lion’s share of the wine closures market. Mainly because of an unfavorable exchange rate that has seen wine exports fall significantly, that 50% share is not as robust as it previously was. Here in Australia, corks are almost history and Orora produces the Stelvin Closure (aluminum screw cap), the ownership of which was achieved as part of Amcor’s acquisition of Alcan Packaging. Cleverly, Amcor will retain the ownership of that technology, which Orora uses under a favorable license for the Australasian region! It remains to be seen what happens when the license expires in five years and both companies have moved well beyond a three year non-compete agreement that is part of the demerger conditions.
The Amcor of three decades ago still had a large pulp and paper business, but with limited downstream processing. Significantly, however, it was then that packaging revenue first exceeded revenue from pulp and paper operations, a key event in hindsight. Today, Orora has but one paper facility, albeit a world class asset, but it has significant assets in corrugated box production, multi-wall sacks and folding carton products. Amcor also now has consolidated a significant share of the New Zealand packaging market, where it learned the fiber box business through investments in Kiwi Packaging in 1973.
Analysis of the component parts of Orora reveal about two thirds of its revenue will be generated in Australasia, of which 87% will be earned in Australia. 73% of that Australasian revenue will come from its fiber-based businesses. Orora emphasizes that 65% of fiber packaging sales are to “defensive” food and beverage segments. In addition to the Botany mill, there are 10 fiber box plants in Australia and two in New Zealand. There are three paper packaging plants, six folding carton plants and a polymer coating facility. Of its other Australasian businesses, there are six beverage can plants, one bottle plant (with three furnaces) and two bottle closures plants.
The US business has been an excellent business for Amcor over many years and comprises three main business groupings. Earnings are dominated by the Distribution sector, which generates 86% of the total. The Landsberg Division commenced in California in 1947 and now operates across the USA supplying corrugated boxes, shipping materials, janitorial products and packaging equipment. The Manufacturing Division has two businesses – Manufacturing Packaging Products (MPP) and Corru-Kraft (CK). CK has four corrugators plus two manufacturing plants co-located with MPP. It primarily services the Californian market through MPP and external customers. MPP converts corrugated sheets at eight plants in California and supplies 50% of the corrugated products requirement of Landsberg Distribution.
Unlike the post demerger Amcor, Orora appears to be more about consolidation than growth, with the fine print concentrating on improving returns from existing assets to “optimize its cost base to be the lowest cost producer.” However, a component of its strategy is to “continue to undertake value-accretive investments, where there are meaningful synergies with recent businesses and also attractive new growth opportunities.” According to demerger documents, the company is partway through a program to “realign overheads and improve manufacturing efficiencies.” The documents are not specific on market share issues. The glass business has aggressively pursued market share growth and is moving to increase its share of the non-wine market. Its competitor has closed down three glass furnaces as Amcor grows market share, but remains more geographically relevant to many of its customers. As the overall leader in the aluminum beverage can market, Orora will be keen to consolidate that status and grow its share of the non-carbonated market, where it has a less significant market share. No quantitative information is provided about the fiber market in the demerger documents. However, it is well known that over the years, Orora’s share of the corrugated box market has declined significantly from being clear leader to a distant number two. With significantly lower paper manufacturing capacity than market leader Visy and fewer corrugated box plants, it would seem unlikely to expect a major turnaround in that regard any time soon.
Coincidentally, Orora listed one day after Pact Group, another significant packaging entity, listed on the Australian Stock Market with an Initial Public Offering. Pact is more of a competitor to Amcor than Orora with a focus on plastic food and beverage packaging, but its key stakeholder has strong family links to the Visy Group.
It seems that the market has taken more to Orora than Pact as a company, but it is early days and the listing of both companies does make the Australian packaging sector a more accessible investment than previously. Because both companies are more exposed to the domestic market, they are better poised than Amcor to benefit if and when the Australian economy starts to grow more strongly as was anticipated after the change of Government and consolidation of a more favorable currency exchange rate.
After a couple of weeks of trading in a somewhat unrepresentative market due to the holiday season, the net position is that Amcor has grown in its stock price and Orora has fallen. The combined value is the same as the day trading commenced, so the value has yet to be unlocked. Orora has been the subject of quite heavy trading and the negative trends suggests investors like Amcor (although it has not outperformed the market) but are perhaps less convinced about Orora. Press reports noted that analysts expected heavy selling in Orora shares over the first few weeks because most of Amcor’s international shareholders – who received one share in Orora for every Amcor share – are not considered long-term holders of the stock. Before the demerger, analysts had valued Orora shares between $1.40 and $1.75, so the current share price of $1.17 would be considered disappointing, but it would be premature to read too much from this short history as a company.
Perhaps investors in Amcor who stayed with both Amcor and PaperlinX for many years may be adopting a wait-and-see approach to be sure that Orora is not another PaperlinX. The published strategy for Orora seems to be very much about convincing investors that it will stick to its defined business, but there must be some trepidation that future boards and management will feel the need to grow through acquisition rather than organically. Time will tell.