Global miner Rio Tinto agreed to sell its Alcan packaging unit for about $2 billion to Australia's Amcor Ltd , easing its debt burden after an ill-timed acquisition two years ago.
Amcor said the deal will make it a leading global player in key packaging markets. It marks Amcor's first big buy under Chief Executive Ken MacKenzie, following four years of fixing, closing or selling businesses which had suffered after a $3.2 billion takeover binge in Europe and the Americas earlier this decade.
The deal is a key part of Rio's efforts to pay down $38 billion in debt. Two years ago, the world's second-largest miner targeted $15 billion in asset sales to help cut debt after buying the Alcan aluminum business at the top of the market.
Their debt is well under control, it's just a question now of getting rid of non-core assets and being disciplined in doing so, said Tim Schroeders, a fund manager with Pengana Capital, which oversees about A$6 billion.
Buying interest for Rio's assets has slipped since the global financial crisis, forcing the company to turn to a $15.2 billion rights issue in June to raise capital.
This gives Rio that flexibility. There is obviously a large number of projects in exploration and development that now can be seriously entertained. Whereas before it was more a case of managing cash flows, Schroeders added.
Rio had already agreed to sell assets worth $6.6 billion over the last 18 months. The divestment program continues for other assets identified for sale, including Alcan Engineered Products, Rio said in a statement.
Rio said in June its net debt would be cut to $23.2 billion following the rights issue. Rio reports earnings on Thursday.
Bigger mining rival BHP Billiton had debt of $5.6 billion at end-June.
DEAL TO BOOST AMCOR EARNINGS
Amcor will raise A$1.6 billion of underwritten equity via a 4 for 9 rights issue at A$4.30 a share, as well as debt to fund the deal. The issue is priced at a discount of 24 percent to Amcor's last traded price.
Following the acquisition, Amcor will be among the world's largest packaging companies, with leading positions in flexible packaging, custom PET containers and folding cartons for tobacco packaging, Amcor said in a statement.
In a report last week, investment bank RBS said the potential boost to Amcor's earnings by an acquisition of Alcan's packaging assets would be a powerful near-term share price catalyst.
Amcor shares remain suspended since Monday. Rio shares were steady at A$57.08.
Amcor said its full-year net profit before one-offs slipped 1 percent to A$360.5 million ($296 million), in line with market forecasts.
Now is the right time in the economic cycle to be making acquisitions as asset values are substantially lower than they have been for many years, MacKenzie said in a statement.
Last month, Bemis Co paid $1.2 billion for part of Rio's food packaging business. Bemis paid 7.2 times trailing earnings before interest, tax, depreciation and amortization. Compared to that, Amcor is paying 5.5 times EBITDA.
Amcor knows the business and is an existing player in some of the businesses and as such there are synergies that no other buyer would be able to partake in, Schroeders added.
JP Morgan , UBS , Deutsche Bank , Commsec and Bank of America/Merrill Lynch are the joint leads for Amcor's fully underwritten rights offer.
UBS advised Amcor on the Rio packaging purchase.
(Editing by Mark Bendeich and Anshuman Daga)