UPDATE: Amcor Still In Rio Tinto Talks On Packaging Assets

Amcor Ltd. (AMC.AU), an Australian packaging company, said Friday that talks with Rio Tinto PLC (RTP) about parts of its Alcan Packaging businesses were continuing and there was no assurance that any transaction may result.

Rio, the world's third-largest miner, wants to sell the unit, which provides packaging to the food, drug and tobacco industries, to cut its debt after last year's US$38.1 billion takeover of the Canadian aluminum producer.

Amcor chief executive Ken MacKenzie has said that Amcor, the world's largest maker of plastic soft drink bottles, wants to expand production of flexibles, tobacco and custom PET plastic bottle packaging.

"As part of Amcor's consideration of this potential transaction, it is considering all its funding options," the company said in response to an enquiry from the Australian Securities Exchange about its stock's 12% gain from July 3 to Thursday's high of A$5.21.

"Amcor believes that it is possible that the market has been speculating that Amcor is considering an equity raising to partially fund the possible acquisition of part, but not all, of the Alcan Packaging businesses," it said.

The company said that speculation had increased with Rio's announcement earlier this week that it would sell its food packaging assets to Wisconsin-based Bemis Co. (BMS) for US$1.2 billion.

Rio would have preferred to sell the business in a single deal, but after more than 18 months of ownership and debt mounting, it has been persuaded to break up the unit, analysts have said.

The company has sold US$3.7 billion of assets this year and has an US$8.9 billion debt payment looming next month.

The Wall Street Journal reported Thursday that Amcor is close to a deal with Rio worth as much as US$2.4 billion for parts of Alcan Packaging, its closest competitor in Europe for both flexible and tobacco packaging.

Amcor would buy Alcan's European and Asian flexible packaging assets and its tobacco and pharmaceutical packaging businesses, which have annual revenue of about US$4.3 billion, the newspaper said.

The WSJ said that private equity firms have backed away from the deal because of tighter credit market conditions.

While Amcor's hand may be strengthened, analysts say the company still may face trouble raising capital, gaining approval from competition regulators and convincing investors that the move is right for a company that has struggled to generate returns from a series of acquisitions.

Amcor's balance sheet looks stretched, with net debt of A$3.29 billion at Dec. 31 and a net debt over net debt plus equity gearing of 49.6%.

Citi analysts in a client note said any deal including the European flexibles and tobacco packaging assets would be a "sound strategic fit" and let Amcor gain meaningful market share and pricing power in their respective markets.

Alcan's assets in Asia, where Amcor has been growing its presence, would enhance its business and suit its strategy of targeting emerging and low-cost markets for growth, rather than buying share in mature markets.

Citi reiterated its Buy recommendation on Amcor stock and target price of A$6.00.

"We believe that defensive stocks are not yet out of style, and with a reasonably defensive earnings profile, Amcor will provide relative safety in a deteriorating economic environment," Citi said.

Shares in Amcor at 0425 GMT were down 0.8% at A$5.13, compared with the broader market's 0.4% gain.

-By Andrew Harrison, Dow Jones Newswires; 61-3-9292-2095; andrew.harrison@dowjones.com

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