M&A volume up in 2014 and 'momentum is accelerating'

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Almost every sector of plastics processing saw double-digit growth in merger and acquisition activity during the first half of 2014 with injection molders making up the largest share of deals and blow molders recording the strongest gain.

Transaction volume increased 15 to 17 percent for the first two quarters compared to the same period of 2013, according to investment bankers in the plastics and packaging space.

Chicago-based P&M Corporate Finance tracked 176 deals so far in 2014 with sustained interest in every sector except for sheet and thermoforming companies, which were down by 10 transactions, or 50 percent, from the first half of 2013 because of slowed consolidation.

Blow molding deals are surpassing the sector to date with P&M’s global database showing the 13 transactions completed are up 63 percent from the prior year.

Deborah Douglas, founder of the St. Louis-based Douglas Group, noticed the surge.

“Injection molding is a kingpin still, but this year there’s more of an appetite for blow molders when at one time it was oh, bottles, they’re cheap, not proprietary enough, and they didn’t command great prices,” Douglas said. “Now there’s a pretty good market for them.”

Of the 176 transactions completed, 92 deals came in the first quarter and 84 in the second, which was the first decline in volume since the first quarter of 2013, when many deals were pulled forward into 2012 because of a tax change. Still, volume was near the three-year quarterly average of 86 deals and analysts say 2014 got off to a healthy start and is picking up.

Strategic buyers inked 112 of the 176 deals. However, on a percentage basis, private equity transactions saw the biggest rise of 33 percent due mostly to platform acquisitions.

John Hart, P&M’s managing director of plastics and packaging, points to Genstar Capital LLC’s purchase of Pretium Packaging, a maker of rigid plastic containers and lids, as an example of a platform acquisition in the blow molding sector. Genstar had no packaging company in its diverse portfolio of firms offering medical devices, industrial fasteners and software services.

Hart said Genstar acquired North America’s 17th largest blow molder according to Plastics News’ rankings for $498 million. He considers it a marquee packaging deal for 2014 along with the private equity firm of Clayton, Dubliner & Rice LLC acquiring the well-positioned Mauser Group, which makes industrial packaging, drums and bulk containers, for $1.7 billion.

“There’s still a significant amount of money out there in the private equity community that needs to be put to work,” Hart said. “We’re hearing from private equity groups that they’re being pressured to deploy capital.”

The M&A market is showing no immediate signs of letting up in that respect and others. Plastics M&A deals surpassed the 150 transactions of the first half of 2013 and are on track to meet or exceed last year’s total volume of 328 deals.

“The real change in 2014 is the cyclicals have bounced back,” said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. “There are three things owners look at in terms of selling: their company’s performance, the external market, and are they psychologically ready? They want all three lights to be green. The first light was red then amber for the past few years on cyclicals because of their internal performance but they’re starting to show some good numbers and owners are saying maybe I can sell now. You’ll see all these building products and molding deals going to market.”

In general, transactions take six months or more to complete so closed deals won’t spill from the pipeline right away.

“We’ve seen a significant uptick in activity in the second quarter that will likely result in a strong fourth quarter or first quarter of next year,” Hart said.

Andrew Petryk, managing director and principal at Brown Gibbons Lang & Co. in Cleveland, won’t be surprised if the market gets flooded with inventory in 2015 if not sooner.

“The momentum is accelerating in plastic transactions,” Petryk said. “I think it will be strong for the next two years.

Sellers coming forward

Buyers continue to outnumber  sellers in the plastics industry, but there are more sellers today than the last quarter of 2013 and far more than a year ago, according to Douglas. Overall, she estimates the rank of sellers has swelled 30 percent from this time last year.

“I think it’s climbing nicely. It’s very exciting,” Douglas said. “Volumes are up because more companies are doing fairly well right now. Sellers always prefer to sell when profits are strong. They don’t want to do it in a down time.”

In 2013, 51 percent of the sellers were private owners as opposed to private equity or corporate entities but the figure jumped to 62 percent in the first quarter of 2014, according to plastics industry data from Stout Risius Ross Advisors LLC, an investment banking firm in Chicago.

Of those private owners, Douglas said she is seeing more sellers in their 40s and 60s.

“Isn’t that strange,” she added. “The guys in their 40s are ready to do it. They would like the financial freedom. They would like to do something else. The guy in his 60s doesn’t want to do anything else. He isn’t certain about making a move so he tends to go slower.”

The number of potential buyers is climbing too. Douglas puts the ratio of inquiries she gets about plastics companies at 30 buyers to 1 seller.

“That’s an increase over last year when it was probably like 20 to 1,” she said. “A more mundane time several years ago would have been like 15 to 1. It’s up pretty significantly. It says something about appetite.”

Buyers are hungrier for deals because businesses look more enticing and the credit market is looser. Rick Weil, a managing director at Mesirow Financial in Chicago, said companies that were highly levered when they were purchased in 2006-07, dug out from deep depths in 2008-09, got back on their feet from 2010-12, and are fueling M&A activity in 2013-14.

“They have been to the cliff and now they’re back and things are great,” Weil said. ‘It’s a good time to sell and the multiples being paid for plastics and packaging companies are attractive.”

Favorable multiples

Multiples measure aspects of a company’s financial well-being and often are used to show how much investors are willing to pay per dollar of earnings. The most common metric looks at earnings before interest, taxes, depreciation and amortization.

The typical range of multiples is 5 to 9 times EBITDA in plastics with higher valued businesses like medical and niche companies at the upper end and cyclical businesses like automotive, heavy trucks and building products at the lower end.

“The end market is a key driver of value and beyond that the things that impact value for any company are customer base, customer concentration and unique capabilities. You have to look at the all the factors,” said David Evatz, a managing director at SRR.

For example, Wisconsin-based medical molder Phillips-Medisize Corp. was acquired by private equity firm Golden Gate Capital for an estimated $800 million at an estimated 10 times EBITDA. The company does 75 percent of its business in health care applications — glucose meters, drug inhalers, diagnostic components — and serves the defense, consumer and automotive markets from 19 locations around the world. The transaction put a health care-related injection molder with a global manufacturing platform and deep industry relationships in Golden’s portfolio.

Blaige said his list of deals of interest also has RPC Group plc, Europe’s No. 2 molder of rigid plastic packaging, acquiring both Ace Holding Corp. Ltd in China for $427 million at 7.4 times EBITDA and Helioplast d.o.o in Bosnia and Herzegovina for $13 million at 5.6 times EBITDA. The purchases give RPC its first manufacturing operation in Asia — the world’s fastest growth area — and a reach into the Balkans that is a strategic fit for its Superfos packaging cluster.

Hart said multiples vary so much by sector that he prefers to comment on them directionally.

“Multiples have increased over the last couple years as the market has gotten stronger,” he said. “I’d say they’re as good as I’ve seen in many years.”

Multiples aren’t always disclosed in private deals and sometimes they are simply hard to determine, Weil said. He pointed to the May sale of Hedwin Corp., an industrial packaging business in Baltimore that had filed for bankruptcy, to Tokyo-based Fujimoni Kogyo Co. Ltd. The U.S. business was pushed to the brink by a fire, fluctuating resin prices, compressed margins and delayed capital improvements. With sales of $43.5 million in 2013, gross profit was $3.4 million while debt was about $18 million and assets about $15 million. Still, all kinds of buyers were interested in the manufacturer of high-quality packaging for the medical, pharmaceutical and food end markets.

“You can’t really even put a multiple on it because the earnings were distressed but a lot of people saw something there,” Weil said. “We had a couple international groups looking at it and a lot of domestic guys and private equity firms. They looked at the opportunity and what’s to come. It had a great product line and set of customers. It just needed some investment and love to get back on its feet. The purchase price was north of what we expected.”

Sector interest

Hedwin also makes pail and drum liners and custom blow molded containers. An increase of five deals to 13 gave the blow molding sector its 63 percent increase in M&A activity over a year ago.

Some buyers are focused on the sector, including Graham Partners, which is creating a network of blow molders, most recently acquiring Precision Medical Inc. in Georgia. PMI started out in health care but changed focus to producing PET and high density polyethylene bottles and containers for the food and household chemicals industries.

Deals involving bottles more than doubled to nine in the first half of 2014, P&M says.

Myers Industries Inc. got into the now-hot sector and added to its existing fuel tank offerings with the acquisition of Scepter Corp., which blow molds similar products for the marine, consumer, military and industrial markets. Myers, a rotational molder, produces fuel tanks for marine, recreational vehicle and industrial uses. It agreed to pay $165 million for Scepter, which had sales of about $100 million last year.

Injection molding deals were up 50 percent to 54 deals. That’s 31 percent of the 176 deals that closed. This sector is fragmented but plentiful so there is a larger volume of deals in the space.

“Many highly technical injection molding businesses out there are attractive because they have entrenched positions in their market,” Evatz said.

A couple of the major transactions involved Rexam plc divestitures. Rexam sold its pharmaceutical devices and prescription packaging operations to Montagu Private Equity for $805 million and its containers and closures division from its health care operation to Berry Plastics Group for $135 million. Blaige said the latter deal was within a multiple range of 6.75 to 7.5 times EBITDA.

In another packaging-related injection molding deal, Pritzker Group acquired a majority stake in Technimark LLC for an undisclosed sum to support its growth strategy. Technimark has operations around the world.

Double-digit growth also was seen in the resin color and compounding sector, where 34 deals were completed; the specialty sector, which also posted 34 deals; and the film sector, where 31 deals were done, according to P&M.

In one major resin deal, Texas-based Kraton Performance Polymers Inc. announced plans to merge with the styrenic block copolymer of Taipei, Taiwan-based LCY Chemical Corp. for $696 million, creating a company with annual sales topping $2 billion.

“This deal is noteworthy because Kraton went to China and merged with this company to get into the Chinese stock market,” Blaige said. “It helps the Chinese company become global and it helps Kraton get money.”

That merger hit a potential hurdle in late June after LCY reported unexpectedly low profit for the first half of the year, and now the companies may renegotiate terms of the deal.

In another big deal, Saudi Arabia’s Saudi Basic Industries Corp. and South Korea’s SK Chemicals Co. Ltd. formed a $595 million joint venture. The plan is to operate a worldwide series of manufacturing plants that make advanced linear low density PE, including metallocene resins, polyolefin plastomers and polyolefin elastomers.

And, in one other deal, Tokyo-based Sumitomo Bakelite Co. Ltd., a global producer of thermoset resins and related products, acquired Seattle-based Vaupell Holdings Inc. for $269 million.

A. Schulman Inc. also has been very acquisitive in the sector, buying Prime Colorants Inc. for $15 million and Ferro Corp.’s specialty plastics business for $91 million. The two deals bring the number of Schulman acquisitions to 10 in less than five years.

In the sheet and thermoforming sector, P&M says M&A activity dropped from 20 to 10 deals by yearly comparison.

“It has nothing to do with the attractiveness of the sector,” Hart said. “This has been a focus area over the last several years. It’s not fully consolidated. There are still a number of small and mid-sized players but there’s not as many.”

However, investment firms cut the data many ways. Blaige & Co. combines film and sheet as a processing segment and shows 13 deals of interest.

End markets

Plastics and packaging transactions posted growth or remained flat in nearly every end market, according to P&M. The two largest components of transactions involved industrial and food and beverage businesses. The first half of 2014 saw 78 industrial deals, which makes up 44 percent of the 176 transactions and reflect a 14-deal increase compared to the first six months of 2013.

Among the key industrial deals, Blaige points to Mattel Inc. buying Mega Brands Inc. for $460 million to get into the plastic toy building market dominated by Lego A/S, and Sumitomo acquiring Vaupell to boost its stake in aerospace and medical molding.

The 28 food and beverage deals so far this year made up 16 percent of the total by end market followed by the wide gamut of 21 consumer-related deals (12 percent), 13 auto deals (8 percent), 11 each construction and medical deals (6 percent each), and 7 each electronics and transportation deals (4 percent each).

Food and beverage deals tie into the product segments of rigid and flexible packaging, bottles and closures. In the first half of 2014, flexible packaging was flat with 21 transactions, rigid packaging was down 36 percent to 16 deals, bottles were up 125 percent and closures increased 150 percent with a gain of three deals to five.

Automotive transactions posted the largest percentage gain, growing 86 percent with six additional deals compared to the first half of 2103. In one major transaction, Germany-based ContiTech AG bought Veyance Technologies Inc. in Ohio for about $1.9 billion. Veyance manufactures engineered products for heavy-duty automotive, industrial and military applications.

Construction deals were the only end market to experience a year-over-year decline in M&A activity, decreasing by five transactions, P&M’s database shows.

Cyclicals return

However, several investment bankers see that changing and they are heralding the return of the cyclicals, which includes construction and automotive.

“We’re seeing very strong interest in building products,” Petryk said. “Housing starts were at a trough 12 to 18 months ago and it hasn’t perfectly straightened but it is improving and that too will accelerate. The building products companies that survived the 2008-10 timeframe have proven they have a place in the market and it’s a matter of the demand side improving.”

Door and window profile and siding extruders are doing better and Blaige said owners of cyclical companies are seeing those three lights that trigger sales turn green. He expects increased activity in 2014 and 2015.

So far this year, KP Building Products Ltd. acquired almost all of the assets of Farley Group Inc., which manufactures PVC and aluminum-hybrid windows and patio doors; and PVC door and window profile extruder Veka Group took over one of its competitors, Gealan Holding GmbH.

 In the automotive end market, Petryk said sales have picked up following tough years from 2008-11, when no one wanted to take on car payments and instead put their money into making the vehicles they had last longer.

“During the eye of the storm, people only bought cars if they absolutely had to,” Petryk said. “Now there’s a higher level of consumer confidence and new products are out there coupled with financing options. It’s driving sales volume.”

Blaige said a lot of auto-related companies did not perform well until 2013 or even this year.

“When the owners look at their internal financials, their decision to sell and do an M&A is based on how much money they can get,” he said. “They’re not going to sell until they get back. Things are starting to improve with the economy and these companies are inching back to where they were pre-financial crisis.”

Evatz said first quarter auto end market deals were up 150 percent compared to the same period last year.

“There aren’t as many deals in the space so the movement can be exaggerated but we’re seeing more,” he said. “Many of those businesses are privately held. Given where we are in the cycle, which is probably midway through the upside, it really is a nice time to take advantage of the M&A market for those types of businesses.’”

IPO window open

Blaige also said it worth noting that the market for initial public offerings is open to plastics companies. After withdrawing a filing for an IPO in 2011, Styron LLC started trading in June on the New York Stock Exchange as Trinseo, with hopes to raise $200 million for working capital and to pay down debt.

The Berwyn, Pa.-based materials firm owned by Bain Capital LLC is trying to rebound from 2013 losses of $22.2 million on sales of more than $5.3 billion. Last fall, Styron debuted new grades of Velvex-brand reinforced elastomer compounds for automotive instrument panels.

Plastic pipe giant Advanced Drainage Systems Inc. also plans to sell shares on the NYSE to repay debt and raise working capital. ADS sells more than $1 billion worth of corrugated HDPE and polypropylene pipe a year.

And, Westlake Chemical Corp. expects to raise $272 million with an IPO for a new business that will be called Westlake Chemical Partners LP. The new firm will acquire assets related to the plastic feedstock ethylene and pipelines for the natural gas boom.

Berry Plastics Group, which is in packaging, and Ply Gem Holdings Inc., a building products company, started trading shares last year.

Blaige said there also has been talk of Austria-based Costantia, which is the third largest packaging company in Europe, possibly doing an IPO — it had cancelled one last year — as well as Coveris Holdings (formerly Exopack). Coveris just acquired St. Neots Packaging Ltd. to extend its reach in the United Kingdom and position the company “to accelerate growth to its next phase.

Much has changed in the last five years.

“There were no IPOs in the plastics industry in 2008 and 2009,” Blaige said. “Basically it was a closed window. The fact that the IPO market is open to plastics companies is a huge deal. The IPOs that have been done and the ones people are looking at are very significant because it shows the markets are loosening up.”

Overseas, the early success of an IPO by Polypipe Group plc on the London Stock Exchange was attributed to a rare opportunity to invest in a U.K. manufacturing company at a time the construction sector was seeing growth.

In China, plastic pipe makers Puretown Environmental Technology Co. Ltd. and Dongxin Plastic Co. Ltd. are planning IPOs to raise up to $81 million each and stay ahead of a wave of increasing consolidation. Also, injection press maker Tederic Machinery Co. Ltd. is eyeing an IPO to triple production capacity, bolster its research and development capability, and expand domestic and international sales.

Geographic play

In M&A activity, international participants were involved in 62 percent of all plastics deals while U.S. firms were involved in 53 percent, Blaige said, citing another new pattern.

“We haven’t seen this many
global, cross-border deals in prior years,” Blaige said. “It’s a huge trend now.”

P&M’s analysis shows a U.S. buyer involved with 26 cross-border deals to date, which is a 63 percent increase compared to the first half of 2013. There also were 59 U.S.-to-U.S. deals and 91 foreign-to-foreign deals.

Hart said a notable trend is the increase in foreign buyers purchasing U.S. companies — up from seven deals to 13 — for either growth or because their customers want a local supplier. He points to German-based Simona AG agreeing to acquire Ohio-based Boltaron Performance Products, which makes rigid PVC film and sheets used for the interiors of aircraft, rail and mass transit vehicles.

Simona AG’s North American unit also expanded its thermoplastic sheet business by acquiring Laminations Inc. in Pennsylvania for an undisclosed sum. Their combined product lines could make Simona America’s portfolio a market leader for semi-finished plastic products in the semi-conductor and chemical process industries.

Petryk said most plastics transactions that BGL handles have some element of cross-border activity.

“There’s strong interest from global strategics in U.S. assets,” he said. “We’re also seeing production that moved from the U.S. to China in the process of moving back to the U.S. or Mexico. The cost advantage of China is narrowing because of labor, energy and raw material costs. Then, there’s the logistics like the lead time in getting something to production. And, customers are demanding suppliers be more responsive for design and engineering, and proximity helps both.”

Biggest deals

Some businesses are fetching 10-figure purchase prices in the plastics and packaging industry. In one of the big-ticket deals, The Carlyle Group is paying $3.2 billion for the global industrial packaging business of Illinois Tool Works Inc. ITW wanted to sell off its packaging operations to narrow its portfolio, which has about 800 businesses, and Carlyle officials say they can help the highly diversified division reach its full potential.

Carlyle had $185 billion of assets under its management a few months before the deal was announced in February 2014. Also that month, Carlyle said it would sell Veyance Technologies Inc., which offers rubber and plastics technologies, to Continental AG’s ContiTech division for $1.9 billion.

Private equity group Clayton’s acquisition of industrial packager Mauser from Dubai International Capital was valued at $1.7 billion. The transaction came about seven years after Dubai had acquired Mauser for $1.1 billion and then grew it by 30 locations to 83 sites in 18 countries.

“Many times with private equity, they get to the end of their cycle — buy a company as a platform, invest in it, sometimes do add-on acquisitions — and then they ultimately sell it and return capital to their investors,” Hart said.

Private equity platforms typically are focused on transactions of $200 million or more and banks prefer the larger deals, Blaige added.

“There are fewer banks and they want to put more money out per deal vs. less,” he said. ‘That’s why the reins are looser with larger deals. They don’t want to do 100 $1 million deals. They want to do two $50 million deals.”

In a major transaction related to shale gas, a unit of Koch Industries — Flint Hills Resources LLC — is paying $2.1 billion cash for propylene supplier PetroLogistics LP.

 And, in a whopping deal with a tie to the plastics industry, Zimmer Holdings Inc. is buying its medical device rival Biomet Inc. in a $13.35 billion cash and stock deal.

“That’s a strategic buying from an equity group, which is kind of new,” Douglas said. “For the last 10 years you saw equity groups buying into strategics but now you’re seeing it going the other way.”

In the future

Hart expects positive trends from the first half of 2014 to continue based on several criteria. He said favorable multiples will continue to drive seller interest in exploring a sale; low-cost debt will keep strategic and financial parties extremely acquisitive; and the plastics and packaging space has numerous small and mid-sized suppliers that may desire a shareholder exit.

“The debt markets are really strong right now in terms of what banks are willing to loan on deals and at what interest rate levels,” Hart said. “That drives up pricing a lot of times and it also has people more aggressively pursuing acquisitions because they can get money so cheap.”

Petryk said right now there’s still a scarcity of high-quality plastics businesses on the market.

“We’re encouraging owners of plastics companies to beat the rush,” he said. “We think toward the end of this year and in 2015 there’s a potential flood of activity in the marketplace and buyers will have a good level of inventory.”

About 229 plastics companies are in private equity portfolios with a median holding period of six years and some date back to 2005, Petryk said.

“That dynamic means to us there should be a lot of liquidity events,” he added.

If someone wants to sell a company in 2014, the process should be started today, Blaige said, and if the hope is to sell in 2015, a decision should be made in three to four months.

“If someone is going to take advantage of the marketplace, they need to decide by the end of the summer or they will miss the window,” Blaige said. “The party is not going to last forever. The bar is going to close.”