Amcor announces demerger

Global packaging giant Amcor (ASX: AMC) has revealed a plan to spin-off its Australasia and Packaging Distribution (AAPD) business into a separately listed entity. This news comes just weeks after global pooling company Brambles (ASX: BXB) announced it would spin off its document management business, Recall, having failed to find a buyer for the division.

The Amcor board has taken the view that a demerger “will enhance shareholder value by enabling each company to better pursue their own growth agendas and strategic priorities.” Backing up this view, CEO Mr Ken MacKenzie noted that “although Amcor and AAPD are both packaging companies they are actually very different in terms of product segments and geographic focus. Amcor has global leadership positions in the flexibles and rigid plastics segments, while AAPD operates in the fibre, glass and beverage can packaging markets in Australasia and packaging distribution in North America and Australia.”

While AAPD only accounts for around 15% of Amcor’s earnings before interest and tax, post-demerger AAPD will still be a substantial business in its own right with over $2.7 billion in sales. Those sales are generated approximately 57% from Australia, 33% from North America and 9% from New Zealand.

As part of the restructure, there will be some shuffling of the board and senior management which will include Mr Graham Liebelt, previously the highly regarded CEO of Orica (ASX: ORI) assuming the position of Chairman of Amcor.

The share price has reacted positively to the demerger announcement but before investors get too excited a review of Amcor’s history of demergers may be worthwhile. In 2000, Paperlinx (ASX: PPX), which was previously the printing papers division of Amcor, was spun-off. As the chart below shows, investors who received script in the spin-off have not fared well from their Paperlinx holding.


Source: Google Finance

Foolish takeaway

The general thinking is that demergers create value for shareholders, however it is very hard to ever prove this and they should always be approached with scepticism. While it may be the case that sometimes demergers create value, it is not always the case. Paperlinx’s post-demerger performance is a very real example of this.

Where a division facing tough structural economic issues is cast off to fend for itself it is unlikely that business will prosper on its own. Arguably an event such as this has just occurred at News Corp (ASX: NNC), where the growth division Twenty-First Century Fox (ASX: FOX) has been ‘set free’ from the structurally challenged newspaper business.

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Motley Fool contributor Tim McArthur owns shares in Paperlinx and Twenty-First Century Fox.

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