Reports of Plastic’s Death Were Exaggerated, Amcor Bets

(Bloomberg Opinion) -- It's tempting in our era of bans on plastic bags, straws and cups to suppose that the era of polymers is coming to an end. Amcor Ltd. is prepared to bet $5 billion that's not about to happen.

The company is planning to pay that amount in its own shares to take over Bemis Co. in a deal that would make it the biggest producer of non-paper packaging globally, a person with direct knowledge of the matter told Brett Foley and Angus Whitley of Bloomberg News on Monday, after Amcor shares were halted pending an acquisition announcement.

Such a deal has been mooted for years, and would inevitably be a wager on continued and growing demand for single-use plastic bags. Bemis and Amcor specialize in “flexibles,” packaging-industry jargon for those sacks in which shredded cheese is sold, or the pouches used to carry single-serves of baby food or refills of laundry detergent.

Bemis's growing value – and that of Amcor itself, which has gradually divested itself of paper, glass and metal packaging divisions to focus on its most attractive polymer unit – is an indication that for all our angst about plastics, we keep on using more of the stuff.

Bemis doesn't seriously try to run away from this fact. Its defense of its environmental credentials is a well rehearsed one based largely on the fact that we tend to underestimate the cost of food waste.

This is a complex and hotly contested topic. The industry tends to argue that the greenhouse-gas emissions from plastic packaging are far outweighed by the savings in terms of reduced waste and transport costs (polymers are lighter than glass or metal). Some environmental groups argue those life-cycle assessments are incomplete because they see the entire problem through the lens of climate change, so tend to assume away issues like marine waste.

Independent academic research on the subject is still quite rudimentary (it's extremely rare to find studies that haven't received funding from packaging companies) but tends to lean toward the view that the food-waste savings are real, if smaller than those often promoted by the industry.

There's another argument too, that moving from rigid plastics to flexible ones (Bemis makes both, but increasingly focuses on the latter) reduces the quantity of plastics used. That's certainly true – but flexibles are also very difficult to recycle, unlike rigid plastics which are re-used at similar rates to glass.

In any case, a deal right now makes good sense for Amcor. Its stock in recent years has been trading at a similar forward price-earnings multiple to Bemis's, so it's not going to be short-changing its investors by paying with stock rather than cash.

Meanwhile, demand for flexibles and rigid plastics is forecast to grow at annual rates of 4.3 percent and 3.9 percent through 2022, outperforming other parts of the packaging market, according to consultancy Smithers Pira. Adding Bemis's exposure to Latin America and Asia will also help reduce Amcor's heavy dependence on slower-growing developed markets, while roughly doubling the size of its North American unit.

My colleague Adam Minter's view – that the angst around plastics misidentifies the problem and proposes the wrong solution (which is above all an issue of waste management in a handful of Asian countries) – seems like the correct one, but that doesn't mean there's no long-term risk to Amcor from the growing public outcry against plastics.

Petrochemicals represent the largest share of future oil demand, according to the International Energy Agency, which means the issues around how the world deals with its plastics are about to get a lot more sophisticated. With the exception of a few policies in Europe that have had mixed results, the industry mostly bears few of the costs of disposing of its waste, and carbon emissions from biodegradation are barely being talked about yet.

A future in which the packaging industry bears all of its own external costs may well be one in which we consume more plastics and do less damage to our climate – but it's likely to be one in which the companies that make that packaging become even more low-margin than they already are.

Amcor should be glad it's not paying cash to push itself closer to that future.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.