AUSTRALIA (From news reports) -- Orora has sold its its Australian packaging business to Nippon Paper for $1.72 billion, triggering a surge in its share price of as much as 19 per cent at one point on Thursday.
The packaging manufacturer capitalised on the ambitions of Nippon Paper to take on Anthony Pratt's Visy Industries in the growing paper packaging market, which the Japanese giant believes will grow at the expense of plastic packaging because of environmental concerns.
Orora expects the deal to deliver net cash proceeds of $1.55 billion, of which about $1.2 billion will be returned to shareholders.
The deal is expected to be completed by March 2020, pending regulatory approvals.
Nippon Paper's Sixth Medium-Term Business Plan in 2018 identified paper packaging as a key growth area, forecasting a global "changeover from paper to plastic" driven by environmental and garbage disposal concerns.
The company acquired a majority stake in the Malaysia-based TS Plastics in April with a promise "to promote the paperising of flexible packaging".
Nippon Paper's local subsidiary, Australian Paper, manufactures and sells high-strength kraft paper to producers including Orora, who convert the material into end products like boxes and cartons.
The Orora acquisition has the dual advantage of moving Australian Paper further up the value chain, which is a priority that Nippon Paper identified in 2018, and expanding its production into recycled paper.
It also pits the Japanese giant against Visy, which produces both kraft and recycled paper products.
Craig Dunn, Australian Paper general manager for communications and sustainability, said his company backed Orora's strategy of investing in customisation.
"Visy is certainly a strong player, for sure, but so are Orora," he said.
Orora chief executive Brian Lowe said that Nippon Paper had made its approach 10 days after he assumed his position as CEO in September.
"Ascending to this role, [the sale of the Australasian cardboard business] was not a stated strategy or something we were looking at," he said.
Mr Lowe said he expected the paper packaging industry to grow, but that the decision to sell out of the local cardboard market came down to the value of Nippon Paper's offer.
He said the deal "fully values" the Orora's business, and would free up time to focus on the company's beverage and North American business.
Orora's share price plunged to a three-year low of $2.69 in August, when its full-year results revealed that its North American earnings before income and tax fell 3.6 per cent from the previous year.
The company said on Thursday that it continued to implement profit-improvement activities to lift its earnings, and that it saw strong long-term growth in both of its remaining businesses.
The Orora sale is the latest in a string of local acquisitions by Japanese firms, and will require the approval of the Foreign Investment Review Board (FIRB) and potentially the Australian Competition and Consumer Commission (ACCC).
Nippon Paint bought Australia's largest paint maker Dulux Group for $3.8 billion in a sale approved by Dulux shareholders in July. Japanese beverage giant Asahi Group Holdings made a $16 billion offer for Carlton and United Breweries in the same month, prompting an ACCC review.
Mr Lowe said he was "confident" that the deal would receive regulatory approval, and that Visy's existing footprint across kraft and recycled paper products meant that the acquisition "certainly would not create an advantage for Nippon".
The Orora chief executive said the majority of workers in the fibre business would be retained by Australian Paper but that there would be reductions in areas such as corporate services.
"As a more streamlined group of businesses, there may be some reduction in roles required to support the Orora Group activities going forward," Mr Lowe said.