Why the Amcor Limited share price is soaring today

What: Shares in Amcor Limited (ASX: AMC) have jumped around 2% in early trade on Tuesday morning after the global packaging giant announced a US$435 million acquisition agreement late yesterday.

So What: The deal will see Amcor acquire Alusa, the largest flexibles packaging business in South America with manufacturing operations across Chile, Peru, Colombia and Argentina.

According to the ASX release, Alusa generates sales of approximately US$375 million from the supply of flexibles packaging into the food, personal care, and pet food markets.

The acquisition price has been struck at a multiple of 8.5 times profit before interest, tax, depreciation and amortisation with management suggesting that US$25 million in synergies will be extracted from combining the two companies.

Now What: In making the case for the acquisition of Alusa, Amcor noted that it expected the return on cash invested to reach approximately 15% by the end of the third year of ownership, with a five-year goal of 20%.

Despite Amcor’s size – the group has a market capitalisation of nearly $18 billion – the returns expected to be generated by this acquisition suggest that Amcor remains a stock with significant growth potential.

Likewise, Orora Ltd (ASX: ORA) which was demerged from Amcor in 2013 and Pact Group Holdings Ltd (ASX: PGH) which undertook an initial public offering in 2013 are two smaller packaging companies which also have plenty of growth potential. Orora has a market capitalisation of $3.1 billion, while Pact Group has a market capitalisation of just $1.5 billion.

Given the defensive revenue bases of these three packaging companies – they are all major suppliers into the fast moving consumer goods sector – long-term conservative investors who are seeking reliable dividend payments could consider them for inclusion in their portfolios.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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