GALVESTON, TEXAS - After a few years of acquisition-related overindulgence, smart shopping is set to return to the film and flexible packaging market.
Small firms also will be looking to pool their assets to be more competitive or to catch the eye of an interested buyer, according to Huston Keith, an industry consultant who spoke at Flexpo 2001, held Aug. 21-23 in Galveston.
``The pace [of consolidation] has slowed a little bit now,'' said Keith, who is principal of Keymark Associates in Marietta, Ga. ``People have a little more sanity about what they're buying now. That could be the effect of the dot-coms and what happened to a lot of those companies.''
The overall market remains splintered, leaving plenty of room for deal-making. The five largest film and flexible packaging makers control only 25 percent of the market, while 80 of the 100 largest fall between $5 million and $100 million in annual sales, he said.
Keith singled out Bemis Co. Inc., Pliant Corp., Hood Packaging and Tyco Plastics and Adhesives Group as examples of firms that have succeeded with active acquisition strategies. The four bought at least 19 businesses in a market that averaged one transaction per month from 1996 through 2000.
Other firms have encountered some speed bumps on the road, particularly in cases where large firms have tried to merge their operations.
Keith identified the deals between AEP Industries Inc. and Borden; Printpack Inc. and James River Corp.; and Sealed Air Corp. and Cryovac as examples of the challenges big film/flexible packaging mergers can face. Each of the three mergers resulted in reduced profit and led to other challenges such as lower stock prices and plant closings.
As a result, Keith said, such deals will be unlikely in the future, even though those situations now appear to be stable, with the firms involved maintaining most of their markets. In the future, investors will scrutinize similar deals much more closely, he added.
Keith was more bullish on deals such as the one that created Plassein International last year, when five smaller film companies, each with about $20 million in sales, linked to increase their buying power and market presence. Shortly after forming, Plassein absorbed a sixth member - Rex International Inc. - to boost its annual sales to $180 million.
The only such deal that has not worked out is the 1997 merger that created Pac One Inc. from five smaller film operations. The Dunwoody, Ga., company has filed for Chapter 11 bankruptcy protection and is up for sale.
The successful combinations now benefit from stronger raw materials purchasing; bigger, more-efficient equipment; and an increased importance to their customers, Keith said. The only drawback to such deals may be the slowing of their ability to react to market trends.
Resin purchasing size is key in gaining savings, Keith said. Packaging giants Tyco, Bemis, Sigma Stretch Films, Pliant and Cryovac each now buy between 700 million and 1.2 billion pounds of resin - primarily polyethylene - each year.
The new, bigger firms also can operate wider extruders - some as wide as 200 inches - and larger laminators and orienters, resulting in further savings, he said.
Such deals could be made to qualify for business with large customers. Keith said Procter & Gamble Co. will not do business with firms that have less than $50 million in annual sales. Other deals help dress up the new firm to be bought by a larger competitor that would not bother to look at several smaller companies.
``The smaller companies have to do something, because they can't compete in this environment,'' Keith said. ``They have less bargaining power and smaller, older-type equipment.
``A new blown film line and building can cost $5 million, and if your annual sales are only $30 million, that's something you're going to have a hard time doing.''
Keith listed Sonoco Products Co. and Pechiney Plastic Packaging Inc. as companies to watch in the film/flexible packaging market.
Sonoco has hit the $200 million mark in annual sales, partly through its 1999 purchase of Graphic Packaging Corp.'s flexible packaging division and has announced plans to reach $500 million in sales eventually. Pechiney, with about $800 million in annual film sales, has been aggressive with several acquisitions, including last year's purchase of JPS Packaging Co.