Analysis of BHP Billiton's Potential Acquisition of Amcor Ltd

This article analyzes the potential acquisition of Amcor Ltd by BHP Billiton, including the business, industry, market, economic outlook, cost of capital, valuation methods, and more. The analysis includes the suitability of the target company and its fit with the acquiring company, the type of deal recommended, financing for the deal, regulatory issues, and more.

1. Acquiring firm’s business, Industry, Market and outlook.
Describe the acquiring firm’s business briefly, recent performance, the economic and market
environment and outlook for the firm A. Your analysis should include attributes of the firm and its
capacity to undertake an acquisition to make the appropriate evaluation of the prospects of a
successful merger and the context of with respect to strategic fit. Critically evaluate and comment
on the key factors that will make potential target companies attractive, including any supporting
data or analysis.
The acquiring firm which is considered in this assessment is Bhp Billiton ltd which is engaged and
considered as one of the leading mining and resource business in the country. The company is
regarded as one of the largest mining business after Rio Tinto ltd. As per the market condition of
mining industry, there is wide scope of development and expansion for the business of BHP
Billiton ltd. The only concern for the business is the level of competition in the market. The market
shows that the competitiveness in the industry is immense between Rio Tinto ltd, BHP Billiton and
Fortescue Metals Group and therefore every business is trying to gain competitive advantage over
the other. In such a situation the outlook of BHP Billiton is to effectively diversify the business
and ensure that the business comes up with new products so that a fixed amount of revenue can be
secured. The management of the company intends to have a backup source of revenue in case the
profits from mining business falls. This strategy ensures fixed revenue for the business and also
reduces the overall risks which are associated with a business. The economic outlook of BHP
Billiton is to diversify the business and products in order to aid the business to expand further and
also acquire new markets. In such a situation, a merger or acquisition of another company can be
regarded as an effective strategy to gain competitive advantage over its competitor and also take
advantage of synergy effect in the business.
As per the policies of BHP Billiton, the company has always followed the policy of acquiring
other businesses for the purpose of expanding its own business. The key factors which makes a
merger look attractive are listed below in details:
 Growth: The growth of a company is an important factor which needs to be considered and
this is generally judged on the basis of high growth rate or low growth rate of companies.
 Profitability: The profitability of a business is also considered as a factor before taking
acquisition decisions for a business. Generally listed companies which have lower
profitability are opted as target for acquisition.
 Leverage: The leverage of a business is considered as lower levered businesses are observed
to be much attractive as the level of risks are low in such businesses.
 Size: The size of the business is also an important factor which determines the acquisition.
Generally, a smaller firm is chosen as a target for acquisition.
 Liquidity: The liquidity of a business also is a deciding factor and a criterion for an
acquisition of a business.
The keys which should be there for a merger to be successful are to be considered by the
management of BHP ltd. The annual report for 2018 of the company shows that current assets of
the business is more than the current liabilities of the business which suggest that the liquidity
position of the business is appropriate (Ferreira et al., 2014). The company considered by the
business as the target company is Amcor ltd which is a global packaging company producing rigid
containers and packaging products having a variety of use in different business. The business of
Amcor ltd meets the key success factors which is required in a merger and therefore can be a good
target company for acquisition. An example which can be provided in terms of secondary data is
an acquisition which is made by BHP Billiton ltd in recent times wherein the company acquired
the business of Petrohawk Energy Corp which is a gas company. This move was undertaken by the
management of BHP to further penetrate the gas market of USA. The key factors which make the

target company attractive include aspects like total assets possessed by the business, the earning
capacity of the business, the liquidity of the target company and the current performance of the
business.
2. Target firm’s business, Industry, Market and Economic outlook (1/2 page).
Describe the target firm business briefly, the economic and market environment and outlook for
the firms in question. Data or assumptions on expected market growth rates or any economic
growth assumptions key to your analysis may be included. Critically evaluate and comment on the
key factors that make the companies attractive.
The target company which is considered for acquisition is Amcor ltd which is engaged in the
business of making packaging containers for different products in different sectors. The company
as per the calculation presented below, shows that the market condition for the business is
favourable as the EBIT computed for the year 2018 is shown to be $ 532.3 million which is much
more than the EBIT which is computed for the previous year. The company has a strong market
however in the recent three years the profitability of the business has fallen significantly affecting
the business stability. This shows that the company has good profitability for the year. The
analysis and the computation which are shown in below questions are based on assumption of
growth in sales and COGS of the business (Galpin & Herndon, 2014). The key factors which are to
be considered in deciding whether a company is attractive as a target company depends on the
earning capacity of the business, liquidity position of the business. The valuation of the enterprise
is also to be consider while taking the decision regarding whether to acquire the company or not.
The profitability of Amcor ltd is not much in comparison to BHP Billiton ltd. The size of Amcor
ltd is small as compared to BHP Billiton ltd and therefore the same can be acquired by the
business.
3. Cost of capital and discount rate (1/2 page)
Determine the cost of capital and discount rate appropriate to this potential acquisition. Ascertain
the weighted average cost of capital for the firms. You should determine the beta of your firm by

carrying out your own raw beta estimate or you may use a beta from other sources but justify your
choice.
4. Valuation Method (s) and main assumptions (1/2 page)
Briefly describe the valuation method chosen, namely the fundamental and relative valuation
methods used. You should include an explanation of the stage type model used (eg. Single stage, 2
stage etc). justify the choice of model and any significant assumptions you use.

5. Target firm fundamental and relative valuations (2 pages)
From the data you have been given as well as your research and analysis, determine the forecast or
expected cash flow or dividends necessary to value the target company. Carry out a fundamental
(Discounted Cash Flow) valuation of the share price of your chosen companies and present the
results in a summary table for the firm including the control premium you believe is necessary.
Conduct a relative valuation of your firms also. Your valuations need to include a sensitivity
analysis.
If you believe there are synergies but are having difficulty quantifying, then you can assume a 10-
25% improvement in the target company operating income as a result of the merger. Clearly
indicate your valuation range with and without synergies and discuss this valuation range
contrasting it to the market price.

Valuation Continued

6. Target firm business and suitability as an acquisition target. (1 page)
Analyse and advise on the suitability of the target company and its fit with the acquiring company.
Characterise the potential acquisition and the type of merger this would be with the potential
benefits of the merger to the acquiring company A. Make a clear recommendation whether the
acquirer should proceed with the acquisition or If not why not. You must provide a solid
justification based on your analysis not simply make a recommendation.
The target company which is considered by the management of BHP Billiton ltd is Amcor ltd
which is engaged in the business of manufacturing packing materials and containers for different
industries. In case, the acquisition process is carried out, the intention of BHP Billiton would be to
diversify the business and product line of the company. In case the merger is undertaken by the
management of BHP Billiton ltd, the nature of the merger will be Conglomerate as the principle
activities of both the companies are not related to each other in any way (Cooper & Finkelstein,
2014). The potential benefits for such a merger would arise for the acquiring company as the
merger would signify that the management of BHP Billiton is trying to diversify the product line
which is offered by the business and thereby further increase the overall revenue of the business.
In addition to this, the merger of the business would also allow the management of BHP Billiton
ltd to effectively make use of more resources and expand the main business operations of the
company. In addition to this, the acquisition would also provide a synergy effect on the business of
BHP Billiton ltd which will improve the revenue generating capacity of the business.
Judging from the market condition and the nature of the business for both the companies, the
merger acquisition should not be undertaken by the management of BHP Billiton ltd due to various
reasons.
 Firstly, the sales of Amcor ltd is not shown to be appropriate as per anticipation of the
sales growth and the forecasted data which is shown in the valuation part is also not
appropriate which signifies that the company would not be a suitable option in the long
run (Beamish, 2013).
 Secondly, the liquidity of Amcor ltd is shown to be adverse as seen in the calculation part,
which depicts that current liabilities is more than its current assets and this suggest that the
financial structure of the business is weak.
 Thirdly, the business is not related to the principle activities of BHP Billiton and therefore
would not be able to assist the company in the core activities of the business. On the basis
of the above analysis, it can be said that acquisition would not be favourable for the
business of BHP Billiton ltd.

7. Deal Structure (1 page)
Regardless of your views, assuming the acquisition is pursued make a recommendation with
respect to the type of deal you would recommend, namely cash or equity or some variation. You
should also make a recommendation on the financing for the deal. Your recommendations must
not be in general terms but with reference to your understanding of the acquirer.
The management of BHP Billiton would prefer the payment method of purchase consideration in
partly cash and fully paid equity shares of the business in order to ensure that the shareholders base
of the business is improved and also the liquidity position of the company is not affected in any
way. The partly cash and equity shares means of paying the purchase consideration would enable
the company to takeover the shareholders of Amcor ltd and thereby also increase the number of
shareholders of the business (Lebedev et al., 2015). The acquisition of the business of Amcor ltd
can be smoothly held by ensuring that the payment is done on the basis of partly cash and partly on
the basis of shares of the business.
The financing requirements of the business for the acquisition process is to be done with the help
of debt financing plan which will allow the business to effectively meet the purchase consideration
as per the requirement of the acquisition plan. The annual report of BHP Billiton shows that the
management of the company is dependent more on debt capital rather equity capital and therefore,
it is natural that the management would take loans for the purpose of financing an acquisition as
per the plan of the business. The loan which the business intends to take must be taken on a long-
term basis as the same would help the business to effectively maintain the liquidity status and also
undertake the acquisition of the business which the management of BHP Billiton intends to
undertake.

8. Regulatory issues (1 page)
Provide an explanation of the regulatory issues that need to be addressed by the acquiring
company including any approvals that may be necessary. Will this be subject to consideration by
the takeovers panel or the foreign investment review board. Are there any other issues such as
political reaction to the takeover.
The management of BHP Billiton ltd needs to follow Chapter 6 of Corporation Act and an offer
the shareholders of Amcor ltd a price which they would agree to as a purchase consideration of the
business. The shareholders of the target company must agree to the terms of the acquisition. The
management also needs to provide chartered documents which include certificate of incorporation,
bylaws and other necessary documents which are essential for the acquisition of the business. The
management needs to check the various regulations which are set in the securities market and
which are relevant to an acquisition by a business. In addition to this, the management of BHP
Billiton ltd also needs to ensure that they are not in violation of any provisions of Competition Act
and such acquisition does not create monopoly practices which can be harmful to competition in
the market. The management also needs to consider an acquisition threshold which the business
wants to make which can be complete or partial.
In case of any disputes which arises due to the acquisition process then the same would be taken to
the takeover panel for the process of decision making. Takeover panel is an independent body
which is responsible to administer the codes which are established in the city where the merger
and acquisition is taking place. The takeover panel is responsible for administrating and also
regulates takeovers which are undertaken by businesses. In addition to this, the takeover panel also
is liable to settle disputes of takeover and also settle cases of hostile takeovers by the business. The
decision which will be taken by the control panel would be the final say in the matter. In case of
takeover of Amcor ltd, the takeover panel would have to take decisions regarding acquisition and
must consider all the given evidences which is provided by the appeal making company and take
appropriate decision regarding the same. The political reaction of the takeover would be that the
business of BHP Billiton would become strong in the market and also the market share acquisition
of the business would increase. The level of competition would also be expected to increase in the
market as the business of BHP Billiton would have more resources to deal with the situation.
9. Target Company reaction (1/2 page)
Comment whether this is likely to be a hostile takeover or whether it is likely to be received
positively by shareholders and why. Indicate if you believe this is likely to be a hostile takeover
with reasons why. Assuming hostile reaction what do you expect the company to do.
A hostile takeover is a situation where the acquirer company takeover the target company by
offering directly to the shareholders or fighting with the board of directors for acquisition of the
company. In this situation, the shareholders of Amcor ltd would be offered the proposal of
acquiring the shares of the business. The reason due to which the acquisition would be hostile
takeover because both the business is not operating in same industry and therefore acquisition
would not be beneficial for Amcor ltd as BHP Billiton operates in mining industry. The business
of Amcor ltd has possibility of profitability and improving the business as per the forecasts and
therefore, the takeover would be hostile in nature.
In case of Hostile takeover, the target company which is Amcor ltd could give prior notice of the
takeover proposition of BHP Billiton ltd to the shareholders in order to prepare them for the same.

The management of Amcor ltd needs to apply to takeover panel to resolve the dispute which has
arisen and take appropriate action regarding the same.
10.Market reaction (1/2 page)
The acquiring company made an announcement at the start of the process that it was investigating
an acquisition. It will now make an announcement based on your recommendation as a result of
your presentation and report. Provide your view of the market’s reaction to the merger with respect
to each of the two firms, namely the acquiring firm and the target firm.
As per the discussion which is conducted in the above estimates and also the computations which
are shown for the Amcor ltd, it is clear that the acquisition would not be suitable for the business
and therefore, the management of BHP ltd would announce that the business is not acquiring the
property. The acquisition proposal which the management of BHP Billiton is considering is
inappropriate as the positive sign of acquisition is not present and also there is the fact the there is
considerable difference between the principle activities of both the business. The market reaction
to such an instance would be different as the share price of both the company can fall slightly. The
share price of target company would rise due to the anticipation of the merger agreement slightly
and then the same will fall slightly and stabilise accordingly. Therefore, it can be said that the
market would initially react to change in market but soon stabilise after the actual announcement is
made.

Reference
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