Hard times in the plastics industry could lead to more business for Bill Ridenour and others working in the plastics mergers and acquisitions market.
Ridenour, president of Polymer Transaction Advisors Inc. in Newbury, Ohio, agrees that plastics M&A activity has slowed in 2001 as the economy has taken a hit, causing banks to be more careful with their lending. But this same downturn could cause more small business owners to throw in the towel and get what they can while they can.
``We're getting more inquiries lately from people who are looking to sell because they've lost business,'' Ridenour said. ``We could see a wave of forced selling in the next several years as the Big Three automakers and large firms like Newell Rubbermaid cut back on the number of companies they do business with.
``Companies with bigger portfolios could have a great opportunity to buy in the plastics market.''
Ridenour's expectation of increased M&A business has led him to join with two other plastics-related consulting firms - Danicose Inc. of Chagrin Falls, Ohio, and Hile Management Consulting of Akron, Ohio - to form Polymer Consulting Associates, a venture that will pitch the three firms' marketing, product testing and operations consulting to the plastics industry. Polymer Consulting Associates expects to have its first full-time employee on board by the end of the year, Ridenour said.
The wake of success
The plastics M&A market, like the overall economy, exited a prolonged period of success and is coping with the aftermath. Goldsmith Agio Helms, a Minneapolis-based M&A firm, tracked 250 plastics deals between September 1999 and September 2000. U.S. Bancorp Piper Jaffray tallied a 40 percent jump in buyouts involving custom injection molders between 1995 and 1999.
``With the exception of the last 12 months, there's been more acquisition activity in plastics than at any point in history,'' said Ridenour, who spent almost 20 years in M&A with Cleveland firms Ferro Corp. and the TransAction Group before going on his own in 1999. ``It's been acquisition heaven.''
But the market has slowed in 2001, with Ridenour estimating total M&A activity to be off 40 percent, and deals involving firms with sales of less than $100 million down 50 percent.
That should change in 2002, but business owners looking to cash in might be a little disappointed. The highly valued atmosphere of the mid-1990s - when plastics entrepreneurs could expect to sell for eight to 10 times pretax profit - has disappeared. Currently, selling prices peak out at about five to six times profit, Ridenour said.
``One of the first things we're asked by someone looking to sell is how much we think their business is worth,'' he said. ``Lately, we've made some people unhappy with our answers.''
Ridenour has worked with DSM NV, BFGoodrich Co., Occidental Petroleum Corp. and other clients brokering deals valued between $3 million and $150 million. Last year, his firm, which has full-time associates in Houston and New Jersey, put together GWB plc's acquisition of PolyTech South Inc., an Atlanta-based compounder.
Thomas Blaige, a plastics M&A specialist formerly with Goldsmith Agio, agrees things will pick up in 2002 but does not think plastics M&A action has slowed as much as Ridenour believes it has.
``Plastics M&A is down about 20 percent, but that's less than total M&A is down,'' said Blaige, who brokered packaging film maker Sealed Air Corp.'s May acquisition of Epsilon-Opti Films Corp. ``Global consolidation is continuing to drive [plastics M&A] activity. Firms need to make deals to be bigger.''
Blaige also contends that plastics firm valuations are affected more by individual company performances than by larger market factors.
``Good, solid companies with consistent earnings records and defensible niches can obtain premium prices, particularly from foreign firms, which have been more active in the last 12-24 months,'' he said.
As an example of a ``defensible niche,'' Blaige cited injection molding of proprietary - rather than custom - products in the medical or container markets.
Sooner than later?
Ken Brooks, vice president of Ernst & Young Corp. Finance Inc. in Montreal, is seeing many of the same conditions in the plastics M&A market. Brooks said he expects activity to pick up as soon as the fourth quarter of this year.
``Things should pick up in the latter part of the fall, but pricing likely won't follow lock step with activity levels,'' said Brooks, whose group put together Mercury Flexibles Inc.'s purchase of film extruder Amcor Flexibles Inc. in May. ``We expect to see pricing more aligned with general economic activity. The market won't be overheated like it was from 1998 through mid-2000.''
Overall consolidation should be heaviest in injection and blow molding - where acquirers will be looking to diversify out of the automotive market - and in profile and tube extrusion, where many smaller processors remain and where there has been little or no consolidation to date, according to Ridenour.
Ridenour anticipates a sea change in the automotive market, with the number of direct suppliers plummeting from its current total of 500 to no more than 25-50 in the next 10-15 years.
The rotational molding market is unlikely to be hit by consolidation any time soon, Ridenour said, because it still is developing and is a relatively small processing segment.
Of course, selling is not as easy as putting a ``for sale'' sign in front of the plant and calling an M&A specialist. Ridenour said he has been contacted by several firms that are in or near bankruptcy, which makes a sale much more difficult.
And although buyers currently have the upper hand, according to Ernst & Young's Brooks, they are constrained by greater wariness among lenders. On top of that, companies that were in active acquisition mode two or three years ago are on the sidelines now, looking at improving the efficiency of the businesses they acquired, Brooks said.
``The impact of the earlier activity is that there are fewer buyers now, which makes it harder to bid up the asking price,'' he said.