2012 was a tough act to follow for plastics mergers and acquisitions activity, which declined in the first half of 2013.
M&A firm P&M Corporate Finance LLC of Southfield, Mich., tracked 146 global plastics and packaging deals through June 11 — a drop of 23 percent when compared with the first half of 2012.
P&M reported big drops in the food and beverage (down 31 percent), industrial (down 21 percent) and consumer (down 47 percent) end markets.
Based on processing sector, blow molding saw the biggest percentage drop, according to P&M, slipping 50 percent from 16 deals to eight, but injection molding experienced the biggest plunge in the number of deals, with 20 fewer in the first half of 2013.
The largest dollar-value deal covered by Plastics News in the first half of 2013 was Milacron LLC's $970 million acquisition of Mold-Masters Ltd. Other sizable deals included Jabil Circuit Inc.'s $665 million purchase of North American injection molding leader Nypro Inc., and CCL Industries spending $500 million to buy two packaging units from Avery Dennison Corp.
Deal volume was particularly high in the fourth quarter of 2012 — and even more so in December — as U.S. business owners who wanted to sell raced to get deals done before a change in capital gains tax rates impacted them financially.
In broader M&A activity, strategic buyers paid almost 10 times earnings in deals of $500 million or more, according to Standard & Poor's, while financial buyers paid less than eight times earnings in such deals. In deals of less than $500 million, S&P said strategic buyers paid about eight times earnings. No smaller-deal data for financial buyers was available.
No capital gains, no pain
The rush to avoid paying higher capital gains taxes in 2013 really played a big role in getting deals done in late 2012. This rush may have been best exemplified by resin distributor M. Holland Co.'s Dec. 31 purchase of fellow distributor Christler Chemical & Plastics Inc.
"There was a little push to avoid a tax change in 2010, but not as crazy as last year," P&M plastics and packaging group director John Hart said. "In 2012, we knew there would be a change in the number of deals, but we didn't know how much."
"It feels like the pulse of the market in the first half of 2013 was significantly slower than it was in 2012, and a lot of that was because of the change in [capital gains] tax law," added Stewart Kohl, co-CEO of private equity firm Riverside Co. in Cleveland. "It made a big difference if a deal closed at 11:59 or 12:01."
Return of the cyclicals
Several M&A pros contacted for this story said that 2013 activity is being driven by a return to health of cyclical markets such as automotive and construction. "All the cyclicals are coming back, and that's getting people to buy," said Thomas Blaige, president of Blaige & Co., a financial firm in Chicago.
"We look at the plastics market as industrial plastics vs. packaging," said Andrew Petryk, managing director and principal at Brown Gibbons Lang & Co. in Cleveland. "Industrial plastics is where we've been spending a vast majority of our time. All machinery businesses are showing good activity at this point."
There's been "a significant amount of [M&A] activity" in differentiated plastics companies such as mold makers, machinery firms, and tool and die manufacturers in the last 12-18 months, according to David Evatz, managing director at Stout Risius Ross Inc. in Chicago.
"There's been an uptick in volume in capital equipment," Evatz said. "And if you look at housing starts, metrics are up in the last 12-18 months, so activity levels at building products companies are increasing."
"Within plastics, we want companies with growth and that are in end markets with proprietary products or technology," said Trisha Renner, a managing director with Robert W. Baird & Co. Inc.'s consumer and industrial investments group in Milwaukee.
"Automotive is rebounding and showing higher growth than other sectors."
Beyond the cyclicals, packaging and medical remain the darlings of the plastics M&A market.
"Medical plastics are coveted across the sector," said SRR's Evatz. A company "can do other things, but [medical] drives a lot of business."
"We saw packaging come back a couple years ago, and it's remained strong," Blaige said.
Private equity wants more
The amount of private equity involvement in plastics M&As remained roughly the same in the first half of 2013, at just under 40 percent of all deals, according to P&M. But P&M's Hart doesn't mince words when describing how private equity firms now feel when looking for midmarket deals in plastics and other markets.
"Most private equity firms are not happy with deal flow," he said. "There's not enough of it. They can't find deals to make. There continue to be more buyers than sellers and that drives prices up. A good business can get all types of attention in midmarket deals."
At Polymer Transaction Advisors Inc., based in Newbury, Ohio, owner Bill Ridenour contends that the 2013 plastics market "is still a good market for private equity."
"There's still plenty of private equity in the marketplace," Ridenour said. "There aren't too many places to put your money. There are no real alternative investments to stocks, and CD and bond rates are very low right now."
Debt markets are very accessible in the current market, according to Blaige, particularly for midcap firms partnering with private equity groups. "There are fewer private equity groups out there, but the ones that are there are more active," he said.
Terry Minnick, president of Molding Business Services consulting firm in Florence, Mass., contends there is "a lot of interest" from financial buyers, such as private equity firms, in midsized plastics processors.
At Riverside, Kohl said private equity firms are likely to be "active acquirers" of plastics businesses, since some businesses that would have sold during the recession of 2008-09 remain unsold. Those delayed sales "have created a lot of inventory," he added.
Region-to-region trade active
In cross-border moves, the number of deals in which a foreign company bought a U.S. firm decreased from 15 to nine, according to P&M. But that trend could be changing.
French materials firm Cie. de Saint-Gobain SA made a pair of North American plastics buys in the first half, purchasing specialty bag maker American Fluoro¬seal Corp. and medical container producer Applied Bioprocess Containers. Tokyo-based Mitsu¬bishi Chemical Corp. also bought compounder Comtrex LLC of Michigan.
BGL's Petryk added that, in some cases, outside money invested in North America "is influenced by companies finding that manufacturing in China isn't working out as well as they had hoped."
"It doesn't feel like an appropriate long-term solution," he said. "They're having their product engineers work with China, and it's a bit clunky."
Minnick said MBS recently was contacted by a Chinese toolmaker that was looking to buy a facility in the Chicago or Detroit areas. The toolmaker "sees the need to be in the U.S.," Minnick added. "You wouldn't have believed that three to five years ago."
"A lot of firms are expecting North America to supply their growth right now," said Evatz at SRR. "If companies aren't already in North America, they want to get in. If they are in North America, they want to be more competitive."
Asian firms in particular are looking to the U.S. for growth, added Baird & Co.'s Renner. "They want to buy into a local U.S. entity," she said.
Although exact earning multiples paid in many plastics industry transactions are hard to come by, financial pros said multiples seemed to be up in general in the first half of 2013. In numerous cases, the range of four to six times — which had become a bit of a standard for midmarket deals — was exceeded.
"Multiples are fairly priced right now, but you can argue that they might still be low, with room to grow in the second half," PTA's Ridenour said.
Evatz added that current multiples "are full," especially for firms in niche end markets. Hart added that the rise in multiples could be tied in to buyers being able to get more leverage in strong credit markets.
The Jabil-Nypro deal — which closed earlier this month — drew attention because of Nypro's status as an iconic global injection molder and one that ranked as one of North America's 10 largest in a recent Plastics News industry ranking.
Jabil — a contract manufacturer with annual sales of $17 billion based in St. Petersburg, Fla. — paid $665 million to an employee stock ownership plan to purchase Clinton, Mass.-based Nypro. Investment pros said Nypro's presence in the medical market particularly was attractive.
"Jabil had been a participant outside of the plastics space," said Renner. "But now they've made an investment in plastics technology and acquired a new technology platform."
Nypro employs 12,000 and has annual sales of about $1.2 billion. The purchase includes Nypro's stakes in NyproMold Inc., the mold-making operation, and joint ventures such as Nypro Tool Manufacturing Group.
But Milacron's $970 million deal for Georgetown, Ontario-based Mold-Masters — a hot-runner specialist — topped the price list in the first half.
The deal combines major brands in machinery (Milacron), hot runners (Mold-Masters) and mold components, including bases and plates (DME). Cincinnati-based Milacron bought the firm from 3i Group plc of London. The combination of DME Co. LLC and Mold-Masters is likely to make the company one of the largest global suppliers of hot-runner systems. But Milacron CEO Tom Goeke said they will be run as separate businesses.
Renner described Mold-Masters as "a high-tech, high-growth business serving a global 'Who's Who' of industries. It's a blue-chip company."
The Milacron/Mold-Masters deal came less than a year after Milacron itself was acquired by CCMP Capital Advisors LLC — Milacron's second owner since filing for bankruptcy in 2009. Milacron has annual sales estimated at $830 million. Mold-Masters' annual sales are around $270 million.
Blaige's list of quality first-half deals includes Austrian packaging maker Constantia Flexibles GmbH buying Mexican flexible packaging maker Global Packaging Corp. NV. Terms were not disclosed. Both firms are portfolio companies of One Equity Partners, which is New York-based JP Morgan Chase & Co.'s private equity firm.
One Equity Partners also in 2013 has acquired pressure-sensitive label manufacturer Spear Inc., based in Cincinnati, and processor Parikh Packaging Pvt. Ltd. of Sanand, India.
Blazing trail into second half
The second half of 2013 won't have a driving factor like capital gains to spur plastics M&A activity, but financial pros contacted for this story still expect it to improve over the first half.
"There's a lot of enthusiasm," Riverside's Kohl said. "The challenge is to find companies with growth." Evatz at SRR added that "there's still a significant amount of capital out there — that hasn't changed from the end of last year."
"We feel good about industry trends for the rest of the year," Barid's Renner said. "There are a number of strategic buyers who are flush with cash. But, in general, financial buyers can be competitive with strategic [buyers] going into the second half of 2013."
BGL is working on a half-dozen deals in plastics, Petryk said, ranging from family sell-offs to private equity investments and covering spots on the globe including the U.S., Europe, China and Mexico.
At MBS, Minnick might be leading the plastics M&A industry in boundless optimism.
"The market is white-hot to us," he said. "We've already done two deals this year and have four letters of intent. There's tremendous interest in all types of deals. Some of our deals are drawing 75 requests for information."
The market slowdown of 2008-10 made it difficult to sell businesses, causing some that would have been put up for sale to stay off the market. That buildup created a market condition that Minnick described as "putting a pig through a python's belly."
That condition is improving, with some of the delayed properties selling because of an improving mood among buyers.
"No one buys unless they're optimistic and they think that what they're buying will go up in value," Minnick said. "People are a little more optimistic right now — not that the U.S. is the best, but it's better than a lot of places. They sense that the next five years in manufacturing will be better than the last five years."