Rio Tinto’s pain is packaging giant Amcor’s gain

The results of packing giant Amcor and global miner Rio Tinto indicate fortune does indeed favour the prepared.

Rio Tinto, the world’s second-biggest mining group, reported its first ever annual loss last week, following more than US$20 billion (HK$155.1 billion) in write-downs since its top-of-the-market US$38 billion (HK$294.7 billion) takeover of aluminium firm Alcan in 2007.

On the flipside, Australia’s Amcor on Monday announced an almost 6 per cent jump in its half-year profit, underpinned by its US$2 billion acquisition of the Alcan flexible food and tobacco packaging units that Rio Tinto dumped three years ago, after the global financial crisis hammered the mining company.

When Amcor sealed the Alcan deal to become the world’s biggest maker of flexible food, healthcare and tobacco packaging, its half-year profit was just A$173 million (HK$1.38 billion).

Earnings have nearly doubled since then for the company, whose products include instant soup packs for HJ Heinz, plastic bottles for Coca-Cola Enterprises and yogurt pots for Danone.

On Monday, it beat market forecasts, reporting a profit before one-offs of A$322 million (HK$2.6 billion) for July-December last year, up 5.7 per cent on a year ago, fuelled by acquisitions it has been able to make thanks to cash generated by the Alcan units.

“It’s been a fantastic company-making acquisition,” said Macquarie analyst John Purtell, the top-rated analyst on the stock. “They paid a cheap price and they’ve executed and integrated the business extremely well.”

When Amcor bought the Alcan units, it predicted it would be able to cull between A$200 million and A$250 million in costs from the combined businesses in three years. Instead, it was able to reap more than A$200 million in savings in two years.

Amcor’s shares climbed 4.4 per cent to a record high of A$9.30 after the first-half results, nearly double their value at the time they announced the Alcan Packaging deal, helped by earnings growth and share buybacks since the deal.

Amcor’s closest rival, US firm Bemis, was another beneficiary of Rio’s woes, which were brought on by the mountain of debt it took on to buy Alcan and the subsequent drop in commodity prices after the 2008 global financial crisis.

Bemis bought the Alcan Packaging Food Americas unit from Rio for US$1.2 billion (HK$9.3 billion) in 2010 and shares in Bemis hit a record high last week at US$37.34, valuing the company at more than US$3.8 billion (HK$29.5 billion).

When Rio Tinto bought Alcan, it only wanted the bauxite mining, alumina and aluminium operations and planned to cast off Alcan’s packaging, engineering and cable assets, together valued at US$6.2 billion (HK$48.1 billion) at the time.

It has reaped only around US$4 billion (HK$31.0 billion) selling most of those assets, including Alcan Composites to Schweiter Technologies , Alcan Cable to General Cable, and a 61 per cent stake in Alcan Engineered Products to private equity firms.

The mining giant was forced into selling as it was on its knees after taking on US$39 billion in debt for the Alcan acquisition just before the global financial crisis slammed commodity markets and aluminium prices slumped.

At the same time, Amcor had just emerged from a four-year deck-clearing exercise of asset sales, cost cuts and moves to settle an Australian price-fixing scandal, and was hunting for acquisitions.

“When the global financial crisis hit we had put ourselves in the position to take advantage of the opportunities that came along,” Amcor Chief Executive Ken MacKenzie told reporters on Monday.

It snapped up Alcan’s European and Asian food and healthcare flexibles businesses when its earnings were weak and paid just 5.2 times earnings, compared with typical valuations on packaging takeovers at 6-7 times earnings.

“It was one of the best deals you’ll ever see,” said Simon Rutherfurd, a portfolio manager at Northward Capital. “The GFC helped that. They got a better price than they might have otherwise have got.”

MacKenzie, into his eighth year at the helm, is promising to continue growing Amcor by picking up cheap assets in mature markets such as North American and Western Europe, and through acquisitions and expanding operations in emerging markets.

Just last week it agreed another bargain deal, the US$115 million (HK$891.7 million) purchase at 5.1 times earnings of some tobacco packaging printing assets from AGI-Shorewood Group in China, Mexico, South Korea and the United States.

“We’re starting to build a pretty consistent track record of disciplined growth,” MacKenzie told reporters.