By: Catherine Kavanaugh
January 29, 2014
Plastics companies changed hands at a decelerated rate in early 2013, but mergers and acquisitions activity picked up pace in each subsequent quarter to 96 transactions in the last three months of the year.
The fourth quarter was only off slightly from the robust deal volume seen at the end of 2012, when there was a race to seal some 101 deals before a change in the capital gains tax rate helped ring in the New Year.
However, overall, the 332 M&A transactions completed in 2013 lagged 13 percent behind the 381 deals inked in 2012, all this according to global activity tracked by P&M Corporate Finance of Southfield, Mich.
Several M&A advisory firms monitor records of all publicly disclosed transactions, culling data from various sources, which leads to various volume counts. But professionals contacted for this story agree world-wide activity was down 5-13 percent.
The year-over-year decrease can mainly be attributed to the completion of just 67 deals in the first quarter, according to P&M investment banker John Hart, who said 2013 was slow for a couple reasons other than the tax implications that pulled some transactions forward into late 2012.
"The year reflected a hangover from the economic and political uncertainty caused by the U.S. presidential election and government fiscal cliff in 2012," Hart said in a telephone interview.
However, buyers shook off any lingering reluctance. Hart said they finished 83 M&A transactions in the second quarter of 2013 followed by 86 in the third quarter. Deal volume increased from 150 transactions in the first half of 2013 to 182 in the second half with strategic buyers continuing to lead the charge, he added.
Thomas Blaige, chairman and CEO of Blaige & Co., a financial firm in Chicago, said his firm's data shows roughly 430 M&A deals in 2013, which is a 5-percent reduction from 468 deals in 2012.
"It really hit all areas," Blaige said in a telephone interview. "There was probably less distressed-deal activity than 2011 and 2012, when you still had remnants of restructuring and bankruptcy. That component lightened up in 2013."
Overall, 2013 was a "healthy year" for M&A activity in the industry, said Hart, who is P&M's plastics and packaging group director. The firm's database shows the second half of 2013 down by nine deals from the 191 transactions logged in the second half of 2012.
"The beginning of 2013 was slower than everyone thought given how favorable conditions are but as the year progressed it started to pick back up to more historical levels," Hart said.
In North America, M&A activity was down about 6 percent for 2013 but up 4 percent in the last three quarters, according to Bill Ridenour, owner of Polymer Transaction Advisors Inc., in Newbury, Ohio.
"World-wide M&A stats can be misleading," Ridenour said. "The U.S. picture was much stronger than the rest of the world. Europe in particular was as weak as a cat. It was down something like more than 20 percent."
The number of deals in the 2014 pipeline has investment bankers feeling optimistic about the first half of the year.
"We have six or so active engagements in the industrial plastics space currently at various stages in the closing, work up and marketing stages," said Andrew Petryk, managing director of the plastics and packaging practice for Brown, Gibbons, Lang & Co. in Cleveland. "We expect the momentum that really started kicking in in 2011 and '12 and continued into '13 to carry into '14 as well."
Both strategic and financial buyers remain extremely acquisitive, thanks in part to low-cost debt and record levels of cash available for investment for private equity groups, according to a year-end review by the Chicago-based firm Mesirow Financial.
"We view it as a perfect storm or confluence of aggressive buyers and strong capital market supporting transactions at very high valuations," Petryk said. "The shortfall, or disconnect, is the quantity of quality deals."
In the last 12 years, the plastics industry has seen businesses sold and merged at a stepped-up rate for the most part, affecting about 58 percent of 2001's top-50 companies across all processing segments, according to Blaige & Co. data.
The surviving segment leaders continue to pursue M&A deals to maintain their positions, Blaige said.
About 78 percent of the 1,450 U.S. plastics businesses that Blaige tracks have sales less than $50 million, spurring some M&A activity as small- and mid-cap companies seek access to capital by partnering with larger companies and private equity firms.
Blaige estimates that small- and mid-cap companies, which have sales of $50 million to $100 million, make up 84 percent of the plastics industry. From what he is seeing, they're increasingly looking to the M&A strategy for partners to grow to $100 million or more, which is the critical mass threshold the firm recommends.
Meanwhile, companies with capital have become aggressive acquirers in attempts to diversify product offerings, increase market share and retain leadership. Blaige estimates that about 13 percent of the plastics industry consists of large-cap companies with sales of $100 million to $500 million. Mega-cap companies with more than $500 million in sales make up 3 percent of the industry.
From a deal-size perspective, Hart said the smaller to mid-size companies make up a larger portion of the statistics simply because there is more of them.
"The plastics industry remains fragmented," Hart said. "It has been consolidating over a number of years and you're starting to see different industry segments go from having a large number of participants to a smaller number."
As a result, Blaige said, "The greatest impact of consolidation is that the remaining independents find it increasingly difficult to compete with larger, more capable competitors."
In North America, the plastics industry is shaping up to look like a pyramid, said Ridenour of Polymer Transaction.
"There are very, very few billion dollar companies at the top and a whole heck of a lot of $5 million to $25 million suppliers at the bottom," he said. "We helped A. Schulman buy Network Polymers in Akron for about $50 million and that was a little bit larger than the norm. Typically the $10 million to $25 million sale of an injection molder or blow molder is more the norm."
Blaige said there are always a number of "willing targets" for M&A, when both market conditions and internal financial performance are strong.
"These are the two most important determinants of how much of a premium would be applied to a particular company," he said.
Interest by sector
Injection molding transactions again led the plastics and packaging deals, representing 26 percent of M&A activity — 86 deals total — in 2013, according to P&M. Another 21 percent of deals (69 total) were struck in the resin/color and compounding sector followed by 19 percent (62) in film, 16 percent (54) in specialty plastics, 12 percent (39) in sheet and thermoforming, and 7 percent (22) in blow molding.
Jabil's acquisition of Nypro for $655 million was an important injection molding deal that Blaige said illustrates how cross-border trading of non-core assets dominated 2013. The Nypro transaction was a strategic deal that served multiple purposes for Jabil.
"They're [Nypro] in medical, they're in injection molding, they're in America, Europe and China. It brings them [Jabil] into a whole new realm from the electronic circuit board market, which is probably stagnant and very competitive with low margins," Blaige said. "Making insulin pens for Eli Lily is a whole lot better than making circuit boards for Apple. An insulin pen is a critical component."
Resin, color and compounding were bright spots in 2013, said David Evatz, managing director of investment banking for Stout Risius Ross (SRR) Advisors LLC, in Chicago, which saw overall M&A activity drop 9 percent.
"A lot of the time this sector is very specialized and attractive in the sense that companies have niche processes and products that appeal to both strategic and financial buyers," Evatz said.
SRR data shows resin and compounding transactions up 13 percent, thermoforming up 7 percent and machinery up 5 percent.
Even though it ranks last by sector, P&M's Hart said blow molding deals were relatively strong. Despite a decline of eight transactions to 22, the sector increased as a percentage of total deal volume, up from 5 percent in 2012.
The distribution of deals by end market brought a notable shift. The largest component of transactions continued to be industrial — constituting 126 of the 332 deals, or 38 percent, in 2013 compared to 173 deals in 2012, P&M says.
However, there is a new runner-up. Acquirers had an increased appetite for food- and beverage-related businesses. They completed nine more deals than 2012 for a total of 58 last year. Food and beverage deals surpassed the 41 consumer transactions in 2013 for 17 percent of the transaction total, according to P&M records.
In one deal last August, Silgan Holdings Inc. entered into an agreement to buy Portola Packaging Inc. from Wayzata Investment Partners LLC for about $266 million. Silgan makes rigid packaging for shelf-stable food and other consumer goods while Portola makes tamper-resistant plastic closures and containers for the dairy, juice and food industries at eight plants in North America and Europe.
"Silgan views the acquisition as an opportunity to bolster the company's relatively small European plastic closure presence via Portola's manufacturing facilities in the United Kingdom and Czech Republic," Hart said.
Consumer-related deals, which cover a wide gamut of products from galoshes to toys, dropped to third behind food and beverage in terms of percentage of deal volume. P&M's tracking shows 41 deals in 2013, which represents 12 percent of the total and a decline from 63 deals of 2012.
The same database indicates medical held the fourth spot with 35 M&A deals making up 11 percent of all transactions. The end market continues to be popular, increasing from 20 deals in 2011 to 31 in 2012. Another major acquisition was announced recently but hasn't closed: Medical device maker Coviden is buying Given Imaging for $860 million.
The areas of construction, electronics and transportation all showed minor gains while remaining in the same position in terms of overall end market share, according to P&M.
The same database indicates automotive deals fell again from 35 in 2011 to 27 in 2012 to 19 last year.
Evatz said, "It's interesting given that auto volumes are up but M&A activity is down. It just may be companies in that sector feel things are going well enough that if there's an M&A decision to be made they will make it down the road and take advantage of the solid volumes they're experiencing right now."
Hart said one of the largest auto-related deals came in November when Kuaray Co. Ltd. agreed to buy glass laminating solutions/vinyls from DuPont Co. for $450 million. The acquired business makes polyvinyl butyral and ionomer sheets for safety glass as well as vinyl acetate monomer and polyvinyl alcohol products for automotive applications.
Packing it in
By product segment, packaging transactions accounted for 37 percent, or 122 deals, of plastic M&A activity in 2013, which was up from the 118 deals that accounted for 31 percent of volume in 2012 based on P&M data. Rigid packaging deals increased by one to 59. Flexible packaging deals were up by five to 51, and bottles experienced a two-deal drop to 12.
Mesirow investment banker William Hornell said 2013 was a record year for the firm in terms of M&A packaging deals with average multiples of 8.9 times for both paper- and plastic-related businesses. The firm tracks global activity but focuses on U.S. deals, he added.
Hornell chalks the increase up to the recovering economy, low interest rates and accommodative monetary policies that continue to be a stimulative factor.
"Those three forces are helping drive consumer spending and that directly translates in many cases into plastic packaging whether its food or beverage or personal care," Hornell said. "All those end markets are reliable, steady or growing businesses that in many cases are nicely profitable as well."
However, SRR found the packaging segment trailing enough for Evatz to call it a meaningful decline that contributed to the overall year-over-year decrease in deals, which the firm pegs at 9 percent. The sector lacked mega deals, particularly in the areas of film and caps and closures, Evatz said.
In one of the big transactions of late 2013, the New York-based private equity firm American Securities LLC acquired a stake in Tekni-Plex Inc. in a deal an insider told Bloomberg News was valued at more than $700 million.
Tekni-Plex consists of eight companies with 24 manufacturing facilities in North America, Europe and Asia that make thermoformed plastic packaging and tubing products for the healthcare, food and beverage, and specialty end markets.
"The investment in Tekni-Plex aligns with the private equity group's strategy to invest in market-leading companies," Hart said, adding Tekni-Plex had estimated sales of $655 million in 2012.
Other major transactions included CCL industries acquiring the pressure-sensitive label business from Avery Dennison for $500 million and WNA buying Par-Pak Ltd. for more than $300 million.
In film and sheet, Blaige said Vienna, Austria-based Costantia — the maker of yogurt lids and film foil and the third largest packaging company in Europe — completed three deals in 2013 and had a cancelled IPO.
Also, Sun Capital Partners merged its five packaging holdings of Exopack Holding, Britton Group Ltd., Paccor International, Kobusch UK Ltd. and Paragon Print and Packaging Ltd.
Hornell said some of activity is driven by large public acquirers, such as Amcor Ltd., the Australian-based, multi-national packaging company, and Bemis Co. of Neenah, Wis., which bought a specialty film manufacturer in Fosgan, China.
"Amcor made three acquisitions in 2013 and Bemis made one," Hornell said. "They're using M&A as a tool to accomplish strategic goals. Amcor expanded its flexible packaging business in China and India and here in the states they bought Constar. They are already very active in the rigid container marketplace so that was a way to expand their product capabilities. They're reaching into some large, and from their perspective, growing markets."
Resin also continues to resonate. P&M says last year's 70 deals matched the number in 2010 — a recent peak year with 393 transaction in total driven by pent-up demand from The Great Recession. Resin transactions then dropped to 49 in 2011 before edging back up to 56 in 2012 and continuing its climb last year.
In 2013, there were seven more deals in the area of resin, color and compounding, Hart said.
In one major transaction, Mexichem SAB de CV acquired PolyOne Corp.'s PVC resin business for $250 million. PolyOne parted with its last remaining resin production assets, including manufacturing plants and a research operations, to focus on performance materials and specialty coatings.
Masterbatch and compounding companies' deals are generating high multiples for small but healthy businesses, Ridenour said. Plastic additives are, too. Little competition and strong patents contribute to some of the big margins.
"Materials like flame retardants, smoke inhibitors and UV stabilizers impart very important performance properties," Ridenour said. "They are extremely profitable."
While some firms consider plastic additives to be specialty chemicals, Ridenour said they play a big role in the plastics market.
"They're fundamental to plastics and we look at additives as an adjunct of ourselves," he said.
International activity increased from 57 percent to 68 percent, according to the Blaige & Co. database.
"That's huge," Blaige said. "That's where a lot of the pent-up demand was. The U.S. has always been active with M&As."
P&M says foreign-to-foreign deals were up from 50 percent of cross-border activity to 56 percent while foreign investment in U.S. companies was down significantly — from 29 deals in 2012 to 11 in 2013.
Petryk said it also important to note that a lot of the work that shifted to China and other places is returning to the United States as wage differentials shrink and customers demand quicker turnaround on everything from design to engineering to delivery of just-in-time inventory.
"A lot more logistics and lead time need to go into products put on ships that cross the ocean to our border," Petryk said. "Another reason for reshoring is with the expected harvesting of natural gas it will be cheaper to manufacture in the U.S. than other parts of the world. There's a movement to bring back manufacturing and that's one of the contributing factors."
Ridenour said there is a lot of activity tied to the automotive industry in Mexico.
"A lot of U.S. and international buyers are trying to strengthen their positions in the belief that the Mexican part of the auto industry is going to grow at up to 100 percent," Ridenour said. "That's one that's hot."
The 215 strategic buyers outnumbered 117 financial buyers in 2013 based on P&M's database.
"Within strategics, there are a number of consolidators using acquisitions to fuel their growth or compliment their existing business and create bigger, more valuable companies," Hart said. "Going back to 2007, there have been 200-plus deals by strategics each and every year."
Blaige said financial deals were down from 42 percent of volume to 38 percent by his count because of the strategic mandate companies have to achieve global objectives and consolidation.
"That far outweighs the strength and momentum of the financial deals," Blaige said. "All this money out there is good but the strategic motivation outweighs it almost every time."
The biggest deal of 2013 was announced in September when officials of Molex Inc. announced they sold the 75-year-old business that makes plastic components for the electronics market to Koch Industries Inc., for about $7.2 billion.
"Molex is an electrical company but with 500 injection molding presses it's a huge deal for the plastics industry," Blaige said. "Molex uses a lot of plastic for electrical plugs and connectors."
In another 10-figure transaction, AEA Investors LP sold CPG International Inc., the parent company of Azek and Timbertech, to a pension fund in an undisclosed deal. News agency Reuters estimated the value of CPG at $1.5 billion.
However, there weren't as many mega deals in 2013 as past years, financial pros agreed.
In the first half of 2013, the marquee deal was Milacron LLC's purchase of Mold-Masters Ltd. for $970 million. The $655 million Jabil deal followed.
Later in 2013, Tokyo-based Toray Industries Inc., the maker of carbon fiber used in Boeing Co.'s 787 Dreamliner, announced it was buying Zoltek Cos. Inc., based in St. Louis, for $584 million to expand into the windmill blades and auto parts market.
On the materials side, WR Grace & Co., which makes specialty chemicals and materials worldwide, agreed to be acquire the Unipol polypropylene licensing and catalysts business of Dow Chemical Co. for $500 million.
Multiples remain high
Valuation multiples within the M&A activity in the plastics industry were steady for 2013 after reaching higher levels at the end of 2012, Hart said, looking at the most common metric — earnings before interest, taxes, depreciation and amortization (EBITDA).
"They stayed at the higher levels through 2013 based on our experience," Hart added. "They are, unfortunately, rarely disclosed. It's hard enough to get the size of the deal much less the earnings."
Evatz said in the four end markets SRR tracks, the firm is seeing medical plastics companies in the range of 8-10 times EBITDA followed by packaging with multiples of 7-9 times, industrial at 5-7 times (excludes resin companies that are trading higher), and automotive still in the 5-times category.
"It really does matter what your end markets are to get a sense of what the valuation multiples are," Evatz said. "When people ask what's my plastic company worth, a lot of questions follow and the first one is what end markets are you serving."
Petryk said the upward pressure on valuation multiples also is related to the lack of quality assets in the marketplace.
"An A-company that comes to market gets a lot of attention across the buyer spectrum of strategic and private equity," he said.
Average multiples in the plastics industry are 5-9 times depending on product category and the size of the deal, Blaige said.
"High multiples used to be applied more generously to various targets," he added. "Now there's more of a focus on applying them to the best asset. The stratification of multiples is more uniform. The buyers are becoming more sophisticated. A financial group used to look at an injection molder and pay 6 times. Now they say it's an injection molder in medical so let's pay 8 or the injection molder is making car parts we'll pay 4."
Regulated markets, such as medical, food and pharmaceutical, push multiples to the high end of the range.
"If you have a lot of competition from China or you're selling t-shirt bags that are being regulated out of commission, then you might be 4-5 times," Blaige said.
The Molex deal was 11.2 times EBITDA, he added.
"That's a pure multiple. That's true," Blaige said. "It's a huge company, a leader in its sector."
Investment bankers expect the marketplace environment of 2014 to be similar to 2013, at least for the first half of the year.
"As long as the economy continues to show recovery and credit remains strong, I think M&A activity will show a healthy amount of volume," Hart said. "That could change if the economy starts going in the wrong direction or banks stop lending for M&A or something happens in Europe, but sitting here today we don't have any major concerns on the horizon."
Blaige sees a lot strategic activity by private-equity owned companies seeking to grow through add-on acquisitions in 2014.
"They're the most aggressive buyers," he said.
Blaige also said he thinks this is a good year for family businesses and entrepreneurs to come off the sidelines.
"It's a seller's market so it's a perfect time and they need to hurry because these cycles don't last," he said. 'It has been good for 2-3 years now and it won't go on forever. We're at the top of the wave now."