Today's AFR:
Brian Lowe has a 100-day plan. Three months ago, Orora, the cans and bottles manufacturer where Lowe is chief executive, splashed out $2.16 billion to buy France’s Saverglass, its biggest acquisition ever. The market has been pessimistic – shares are down 24 per cent since then.
It was not the reception Lowe had hoped for. Orora, which demerged from Amcor, another packaging giant, a decade ago, saw plenty of opportunities in the market where Saverglass operated. The French company traces its history back 126 years, and has a 33 per cent share of the market for high-end spirit bottles, counting Grey Goose, Glenfiddich and Hennessy as customers.
With consumers around the world trading up to premium alcohol, Orora seized an opportunity to enter a booming market. But the past decade is littered with Australian corporates coming a cropper with offshore deals.
Lowe, who returned to Australia this week after visiting the Saverglass operations at Feuquieres, 130 kilometres north-east of Paris, says patience is required and insists the deal will be a long-term winner.
‘‘The acquisition gives us access to a very appealing premium and ultra-premium segment of the alcohol beverage packaging market, where Saverglass is a market leader,’’ he says.
‘‘We are confident it strengthens our competitive advantage for the company across the world.’’
Lowe told AFR Weekend that consumers were still gravitating to more expensive brands, even as the cost of living rises.
‘‘People are perhaps drinking less, but better quality. A nice bottle of wine or a top-end bottle of spirits is an affordable luxury,’’ he says.
‘‘I think people are also demanding greater value. If they are going to spend $50 or $100, they want to know they’ve got value and quality for that spend.’’
Saverglass is also a big player in supplying bottles to tequila makers, and has annual revenue of about $1.2 billion. It operates six factories in France, Belgium, Mexico and the United Arab Emirates.
Orora shares were at $3.45 on August 17, shortly before The Financial Review’s Street Talk column revealed the company was readying for a $1 billion-plus capital raising. Since then, they have fallen 24 per cent – the Saverglass deal was funded in part by a capital raising at $2.70 per share – and closed on Thursday at $2.57 per share.
That slide has been due to three main concerns, according to Morgan Stanley’s Andrew Scott. The investment bank broker told his clients late last month that the Saverglass purchase was ‘‘a surprise in the strategic direction – with the market thinking an acquisition in the North American beverage can market was a more likely step’’. Instead, Orora made its big move in France, buying from a private equity owner, The Carlyle Group.
Scott says investors were also concerned about the carbon intensity of glass, the challenges of doing business in France, and a lack of ‘‘meaningful synergies’’. Lowe has previously flagged cutting about $15 million in costs by integrating Saverglass, which has 3900 employees, into Orora.
Lowe, who has run Orora for four years and worked at the company since 2011, says a methodical approach to the integration is under way. ‘‘We have a clear transition plan for the first 100 days and beyond,’’ he says.
And there are plenty of bullish brokers in the market. At Goldman Sachs, Niraj Shah suggests Orora shares could rise to $3.55 in the next year.
Saverglass should continue to benefit from growth in higher-end wine and spirits, he says. But economic uncertainty and a normalisation out of the COVID-19 pandemic, as people head back to restaurants and bars, could temper growth in the short term. When people were at home during the pandemic, US spirit volumes rose 9 per cent annually, compared with 3 per cent in the previous three years.
Meanwhile, Orora has appointed a new non-executive director based in France, Claude-Alan Tardy. He spent four decades as an executive with multinational building materials and chemicals company Saint-Gobain Group
Goldman Sachs expects plenty of benefits too from some of the €450 million ($735 million) spent by Saverglass over the past five years. At Orora’s current share price, the entire Saverglass business is valued at just $1.5 billion.
But Shaj says the risks for investors include lower-than-expected pricing power and the potential for prolonged economic weakness in Australia and the US. Lowe says the group is closely watching costs, with inflation in many inputs slowing.
Later this month, Orora will mark a decade since it split from Amcor. At that time, when Amcor was run by now BHP chairman Ken MacKenzie, the division that became Orora was one of the company’s weakest. The independent expert engaged on the deal, Grant Samuel, even warned the benefits of the demerger were ‘‘unquantifiable’’ and a matter of perception.
In the past three months, according to Scott, Orora has ‘‘meaningfully underperformed’’ its former parent company. That is one reason he is not bearish on the stock.
Scott says the Orora share price fall means Saverglass is only being valued at a multiple of 4.3 times on an enterprise value/earnings before interest, tax, depreciation and amortisation basis. ‘‘Even for sceptical investors, this is attractive,’’ he says, adding Orora’s investors will start to value the company more highly as the market gains confidence and understanding of the $2.16 billion business that is slowly being integrated.
After all, there are plenty of obvious growth opportunities. Tequila is going high-end, and demand is through the roof. And spirits will grow from 36 per cent of the total liquor market to almost 39 per cent by 2032. If Lowe is right, the next round will be on sceptics of the Saverglass deal.
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Which all sounds about right to me. ORA worked its assets well and Saverglass is likely a better buy than further US glass plants - although now buying US glass plants into a group with a better product and skill range will be higher value accretive.
BL & team have a big task ahead in offering premium bottles to a wider market outside Europe. We will know in a couple of years.
This new vision of quality glass raises questions around the corrugated packaging commodity business - options emerge in both selling groovy boxes for groovy glass or divestiture for further glass buys.
ORA has positioned itself for a positive future. How long it takes for this to be reflected in the share price is an open question.
Ash
(20min delay)
