Distressed M&As litter landscape

Totals compiled by investment firm Blaige & Co. LLC of Chicago show global plastics M&A activity down 2 percent in the first half, while data collected by P&M Corporate Finance LLC of Southfield, Mich., reveals a 5 percent drop in the first quarter of 2009 vs. the year-ago quarter.

Blaige also reported a 10 percent increase in U.S.-only plastics M&A efforts in the first half, but data from Polymer Transaction Advisors Inc. of Newbury, Ohio, claimed a 30 percent drop in North American activity in the same period.

In either case, veteran M&A observers recently interviewed by Plastics News were glad to bid farewell to the fourth quarter of 2008.

A light already may have arrived at the end of the tunnel in the form of Bemis Co. Inc.'s $1.2 billion acquisition of the Food Americas business of Alcan Packaging.

The deal, which was announced July 6, unites North America's largest and sixth-largest film and sheet makers, according to a recent Plastics News ranking.

“Access to credit was absolutely awful in the fourth quarter,” said John Hart, plastics and packaging group director with P&M. “In the first quarter [of 2009], asset-based lending came out of the woodwork and we started to see some flickers of improvement.”

Blaige CEO and managing partner Thomas Blaige agreed, describing the fourth quarter as “horrible.”

“Prices dropped so much, and there were no purchases and no orders,” he said. “Sales numbers were down 20, 30 — even 40 percent.”

But even if the raw numbers for the first half were not off that much from last year, Hart, Blaige and Bill Ridenour, PTA's president, said that the market filled up with far more distressed deals than in previous years.

“I thought there would be a lot of distressed deals in '09 because of debt and because of the economy falling off,” Hart said. “But I didn't expect the number of distressed deals to be at the level it was.”

According to P&M, 64 percent of all global plastics M&A deals in the first quarter were distressed — caused by a bankruptcy or a forced sale — or included companies with less than $30 million in annual sales.

“When we first looked at the [first-quarter] data, we said ‘That can't be right,' ” Hart said. “And we're seeing signs that the second quarter may be similar to the first.”

Blaige added that he's seeing the same signs. “Purging could begin in the next month,” he said. “Banks became aware of these situations in the fourth quarter and first quarter and put companies on probation.

“A lot of companies are in trouble and a cleansing will occur. In the next 90 days, we could see a lot more divestitures and sales.”

The makeup of the M&A market also could favor strategic buyers already in the industry over financial buyers, Ridenour said.

“Many private equity companies can't maintain bank financing,” he explained. “And they don't want to put equity or skin in the game because it's a riskier market. Some private equity firms have a moratorium on investing in manufacturing until the recession is over.”

Strategic buyers are active, but private equity is doing more distressed deals as well, Hart said: “Some strategic buyers are acquiring pieces of business and consolidating. There's excess capacity in the industry, so book deals are escalating. But it's harder to get value now.”

In spite of the uncertainty, some solid deals were completed without the burden of massive debt during the first half of the year.

Blaige praised Sigma Plastics Group's February purchase of a majority stake in ISO Poly Films Inc., a maker of specialty multilayer films and pouches for food packaging in Gray Court, S.C.

Sigma of Lyndhurst, N.J. — with annual sales of $1.5 billion — gained value-added products by adding ISO Poly, which has annual sales of $52 million. The Sigma-ISO Poly deal was “a good asset pickup,” Blaige said. “Smart players can get preferred assets, not for dirt-cheap, but for less than they would have paid before this year.”

Blaige cautioned that buyers looking for rock-bottom deals might be disappointed.

“People think M&A is completely elastic, but that's not the way it works,” he said. “The market isn't going to go down 90 percent. Owners aren't going to give these companies away.”

All three firms also had a positive view of injection molder Pelican Products Inc. buying rotational molder Hardigg Industries Inc., in a deal valued at about $200 million. Officials said the deal combined the largest injection molder and largest rotational molder in the protective-case market.

Torrance, Calif.-based Pelican has financial backing from Behrman Capital, a private equity firm with offices in New York and San Francisco. Hardigg is based in South Deerfield, Mass., and has a plant in Greenfield, Ind., and a joint venture in Paris.

P&M further split first-quarter deals into separate processes and end markets.

Food and beverage was the largest sector in packaging with 11 first-quarter deals. That category also tied for the lead with industrial in the film category with five deals.

In injection molding, automotive led the way with five first-quarter deals, while in sheet and thermoforming, the consumer sector claimed the top spot with three deals. Food and beverage also accounted for three of the four first-quarter deals in blow molding.

Where acquisition prices are concerned, P&M saw an average global drop from 7 times earnings before interest, taxes, depreciation and amortization in the first quarter of 2008, to 6.1 times earnings in the same period this year. Multiples definitely are down, but they can vary from sector to sector.

Companies in big-ticket markets like auto, construction and appliance may draw multiples of 2.5-3 times EBITDA, as compared with 6-7 times for higher-end or specialty firms, Ridenour said.

P&M's Hart estimated that custom injection molders might go for 2.5-3 times earnings in the current market, with some packaging or medical firms fetching multiples of 5-7.

Blaige pegged EBITDA multiples for some plastics-related medical businesses at 7-8.

“We're seeing leveraged multiples, but nowhere near the glory days of 2006 and 2007,” Hart said. “Multiples got pretty high there for a while, and were partly inflated. I don't see them getting back to where they were.”

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