Amcor Ltd [ASX:AMC] is an Australia based packing company. It’s also a major player in the global packing industry. Given its dominance in the market, Amcor didn’t perform terribly well last year. Share prices generally cycled up and down, never hitting above the $15 mark. But the packaging giant may be off to a good start for 2016.
Source: Yahoo finance
Acquisitions will be key for growth
This morning Amcor announced the acquisition of US-based private company, Deluxe Packages. Amcor will be spending US$45 million for the acquisition in hopes to grow stagnating profits.
Deluxe Packages supplies flexible food packaging for snack providers. The US Company generates annual revenues of around US$42 million from year to year.
Thus, Amcor saw Deluxe as an opportunity to grow their North American business. This is the first acquisition of the year for Amcor. And possibly one of many. Just last year, Amcor acquired four different businesses.
I know what you might be thinking, 2015 was a big year for acquisitions but that doesn’t mean 2016 will be. You could be right for many companies but not Amcor. Managing director of Amcor, Ron Delia stated late last year that ‘acquisitions will be critical to future growth.’
Is this a sustainable business model?
Acquisitions aren’t sustainable
Looking at Amcor’s History page on their website, you would think they specialise in takeovers. Sure, it isn’t a bad thing. Acquisitions allow companies to grow and evolve. Yet these acquisitions need to be financed somehow. And it’s usually through debt.
I’ve always been told there is good debt and there is bad debt. Good debt is when you might borrow to buy an asset that yields income. A loan for a house or an investment yielding guaranteed returns. Bad debt is usually the opposite of good debt. Borrowing money to buy a car or consumer goods would be a form of bad debt.
Is acquisition debt a form of good debt?
It depends on many factors such as: the motives for the acquisitions; the amount of capital spend and; weather the acquisition will add value to shareholders.
Amcor has doubled their interest incurring liability’s (debt) since 2014. The debt levels are understandable. But shareholders will need to determine if continual acquisitions are worth it.
How will Amcor perform going into 2016?
Amcor is definitely a strong company. It has had huge growth in revenues and cash flows on the back of acquisition. However, Amcor may need to step back and manage their debts.
If debt starts to become a problem then there may be fewer acquisitions in the future. If ‘acquisitions will be critical to future growth’ then it’s probably not best to burn through cash by taking over too many competitors right away.
The most recent North American acquisition ‘is an attractive region for flexible packaging’ Mr Delia said. ‘This acquisition represents an excellent opportunity to accelerate profitable growth,’ he further added.
Time will tell if the most recent acquisition will strengthen Amcor’s North American operations. But more might not be the best course of action with extremely high levels of debt.
Junior Analyst, Money Morning