Buying Berry Global, Holding Amcor plc

seekingalpha11-20

Amcor's $8.4 billion acquisition of Berry Global at $73.59 per share is a decent deal, given Berry's strong cash flow and improved capital structure.Despite Berry's high goodwill and intangible assets...

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That holds true whether the asset is a computer or an entire company. If an asset can be acquired at a reasonable price, then it’s a positive for shareholders. If, on the other hand, management overpays for an asset, even a high-quality asset, that’s terrible for investors, in my view. For those of you paying attention at home, Amcor plc (NYSE:AMCR) has agreed to purchase Berry Global Group (NYSE:BERY) for $8.4 billion in an all stock deal, valuing Berry at $73.59 per share, an approximate 11% premium over the current stock price. As an Amcor shareholder, my immediate question is, “is this a good deal or not?” I’m going to answer that question by looking at Berry Global, and hereafter I’m just going to refer to it as “Berry.”. In particular, I want to focus on the earnings generating power of the firm, whether or not it’s likely to be a net source or use of cash, and, of course, the relative valuation. If management can acquire these shares cheaply enough, that’ll insulate them from many of the risks associated with the variability in the business cycle, which will make this a “good” deal. Those who subject themselves to my stuff regularly know that I’m positively obsessed with making my readers' lives as pleasant as possible. One of the ways I do that is by trying to save them time by putting a thesis statement near the beginning of each of my articles. This allows them to get in, get the “gist” of my thinking, and then get out before they’re exposed to too much of my brand of what passes for humour, or proper spelling. You’re welcome. While I think excessive goodwill on the balance sheet presents a real risk that Amcor will suffer a write-down over the coming years, I think this is a decent acquisition for Amcor at the agreed upon price. Berry is a company that generates decent cash flow, and has used that to improve its capital structure, and boost the dividend. The shares are richly priced on a price to book basis at the moment, but are otherwise either “reasonably priced” or “cheap”, depending on the metric used. So, I think this’ll be a great acquisition for Amcor, and I think these shares represent an opportunity to make a decent capital gain between the current price and agreed purchase price. I’ll be picking up a few shares of Berry to do just that, and I’m staying long Amcor. Financial Snapshot The company announced I think the financial picture at Berry is actually pretty good. The company has earned an average of $656 million over the past 4 years, has generated an average of $1.541 billion in CFO, and needed to invest only an average of $585.5 million over the same time period. Additionally, shareholder equity has grown about 13.5% since 2021, the majority of the increase having taken place over the past year. When it comes to acquisitions, I immediately look for what I consider to be potential financial landmines, like Valuation Allowances and the like. The only potential problem is the fact that goodwill and intangible assets represent about 45% of the capital structure at the moment. Thus, there’s a chance that we may see a goodwill write-down that is too common in acquisitions, assuming Amcor doesn’t acquire the firm at a reasonable price. On the literal “other side of the ledger”, though, the level of indebtedness has improved massively over the past four years. Specifically, it’s down about $1.145 billion, or about 12% from 2021 to now. Given all of the above, I think Berry would be a great addition to the Amcor PLC business at the right price.   Berry Global Group Financials (Berry Global Group investor relations) Valuation Those who read my stuff regularly know that I look for assets that are trading “cheaply”, and that I determine what’s cheap or not based on a few factors, some more complex than others. On the simple side, I look at the ratio of price to some measure of economic value, like sales, earnings, and the like. I want to see an investment trading at a relative discount to both the overall market and its own history. The case here is slightly different in that I need to perform the analysis assuming a purchase price of $73.59. I’ve found that the price is “a bit rich” or “reasonable” depending on whether you look at the capital structure, or the income statement. You may recall that earlier in the article I fretted about the fact that a significant portion of the balance sheet here is made up of intangible assets. My trepidation is not helped by the fact that the shares are trading at over 2.25 times book, per the following: Data by YCharts When we look at the income statement valuations, things look much more rosy. The following current charts are based on a price of $66.20, and show price to sales, and price to earnings ratios of .652, and 14.15 respectively. Now, using the mathematical skills that were not so lovingly beaten into me by the good sisters at Holy Spirit School, I can work out what the P/S and P/E ratios will be at the $73.59 purchase price. They are .725 and 15.72 times respectively. These are either quite reasonable, or near the mid-range in my view. So, if you value assets based on book, you may not love this price, but if you care about the price relative to the cash flow generating capacity of the firm, $73.59 seems to be a fairly good price to pay for the business. Data by YCharts Data by YCharts In addition to simple ratios, I also like to consider what the market is currently “thinking” about the future of a given company. I do this by using the stock price itself as a source of information, the philosophy and methodology for doing this expressed by Stephen Penman in his book “Accounting for Value.” In the book, Penman shows investors how they can employ a bit of high school algebra to isolate the “g” (growth) variable in a standard finance formula to work out what the market “thinks” about the long-term prospects for the company. When I review Berry using this methodology, a price of $73.59 implies that the market “thinks” that the firm will be bankrupt in about 20 years, which I consider to be a fairly pessimistic forecast. Please note, that this analysis is predicated upon analyst consensus earnings forecasts, and they might be a bit rich in my view. That written, even if we assume that earnings will remain flat over the next two years, the current price assumes the company will grow at a rate of about 3%, which is not egregious in my view. Given the above, I think Berry is a fairly decent investment in its own right. Thus, if Amcor ends up buying the shares at $73.59, I think it will benefit shareholders at the firm. Additionally, I think people who buy shares of Berry Global at the moment can be reasonably assured of a nice 11% uptick in price from current levels.  .","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"Company Corporation,analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484115024"}