The buyers' market in plastics mergers and acquisitions doesn't look to be fading any time soon.
Simply put, most companies have dropped in value because they generate lower sales and profit than a few years ago, said plastics M&A advisor Bill Ridenour, president of Polymer Transaction Advisors Inc. in Newbury, Ohio.
Plastics M&A experts Ken Brooks of Ernst & Young Corp. Finance Inc. in Montreal and Thomas Blaige of Lincoln Partners in Chicago also believe the buyers' market will continue, but they have their own perspectives on the hows and whys.
The number of distressed sales - where processors or compounders are forced to sell their businesses or assets to cover bank loans - will increase in the short-term, Ridenour said in a recent interview. Blaige contends that although such sales are more dramatic, the greater number of plastics deals actually will come via corporate divestment as publicly held firms shed noncore businesses.
Such moves make up about 75 percent of Lincoln Partners' current plastics business, Blaige said. He cited recent sell-offs by Rexam plc and McKechnie plc as examples of noncore shedding.
``It's not just troubled companies that are creating the market,'' he explained. ``There's a lot of corporate divestment because stock prices are down, but it's being overlooked.''
According to new data compiled by Ridenour, a processor or compounder with annual sales of $100 million and pretax profit of $10 million could have commanded a market value of $70 million in 2000. But by 2001, with pretax profit slipping to $6 million, the same firm would have fetched only $30 million. In effect, the earnings multiple for a company of that size dropped from 7 to 5, Ridenour said.
Earnings multiples for smaller firms fell between 1 and 2.5 points in that time frame as well. Even small firms with sales of $5 million or under that were selling for earnings multiples of 3.5-4 in 1995-99 saw that number drop to 2.5-3 in 2000-01.
As a result, selling prices for plastics firms have hit a 10-year low, he said.
Blaige doubts many sellers will act with earnings multiples of less than 4.
``If [sellers] are facing a multiple of 2.5, they'll probably just hold onto their company,'' he said.
A notable exception to this low-multiple trend occurred last year, when Pliant Corp. acquired film extruder Uniplast Holding Inc. for $55 million - an amount that Blaige said was almost 14 times Uniplast's pretax profit (EBITDA, or earnings before interest, taxes, depreciation and amortization). Pliant had identified a large amount of cost savings in the deal, which prompted the higher multiple, Blaige said.
A number of investors are realizing that acquisition prices in plastics and many other industries were overvalued in the latter half of the 1990s, Brooks added.
``The projected growth and synergies that buyers expected haven't materialized,'' he said. ``As a result, we probably won't see higher transaction multiples even if we see higher activity.''
Banks also have become more strict with plastics firms as the banks' own levels of bad debt have risen.
``A growing number of processors can't cover the cost of servicing their debt,'' said Ridenour, who spent almost 20 years in M&As with Cleveland firms Ferro Corp. and TransAction Group before going on his own in 1999. ``Then they're in violation of their loan covenants and the banks can really force the issue.''
Other firms run afoul of their bankers by missing cash flow targets they had established at the outset of their loans, putting themselves at risk even if they are making their loan payments, he said. As a result of bad loan activity, banks also are putting stricter provisions on any new lending that could keep businesses afloat.
``It's a great market for buyers,'' he said. ``Companies that are otherwise healthy are having to sell. Buyers can pick up good companies at low prices and profit as the economy rides back up.''
Banks are making it especially tough to finance deals for firms with between $5 million and $10 million in annual sales, Blaige said. ``Those deals are looked at as too risky today, even though banks were doing a lot of them five years ago,'' he said.
Financial buyout firms and ``hybrid'' buyers - those with businesses in related industries - have been the most active in the current market, said Ridenour. Strategic buyers from within the plastics industry, such as Nypro Inc. and Flextronics International Ltd., have stayed on the sidelines to a degree by slowdowns in their own businesses, he said.
Blaige sees the buying climate a bit differently, arguing that strategic buyers currently have an advantage over financial buyers, in that they can move more quickly while financial buyers wait for their financing to be approved by bankers that have grown more demanding in recent months.
However, fewer buyers are emerging, said Blaige, who said firms that once attracted seven to 10 buyers now attract four or five. Deals also are being structured differently, with stock, real-estate leases, options to buy other businesses and other variables being included to make up for lower earnings multiples. Blaige cited Collins & Aikman Corp.'s buy of Textron Automotive Co.'s trim unit as a deal that featured some creative structuring.
Although overall M&A activity has slowed considerably in the last 15-18 months, plastics M&A activity slowed to a lesser extent, Ridenour said. The exception comes from firms with $50 million to $100 million in sales, where activity decreased 50 percent as banks have backed away from financing lower-valued deals.
Again, Blaige has a somewhat different angle. His tracking of global plastics M&As listed 216 deals in 2001 - an increase of three from the previous year. The biggest year-to-year change was in injection molding, where the number of deals surged from 58 in 2000 to 71 in 2001.
Looking ahead, Ridenour expects the U.S. economy to begin a broader upturn in 2003. In 2002, plastics M&A activity should pick up gradually, with strategic buyers slowly re-entering the market.
However, he does not expect banks to loosen their lending practices until late 2002, since many banks want to see two quarters of improved profitability and better performance on their portfolios before getting more aggressive.
Recent activity from Tyco International Ltd. and Ivex Packaging Corp. are encouraging signs that plastics M&A activity will increase later this year, Brooks said.
``There's decent interest in firms in the medical field or in proprietary plastics packaging, like specialty closures or noncarbonated, nonwater PET packaging,'' he pointed out. ``But there's only marginal interest in markets that are looked at as cyclical, like automotive or information technology.''
The sluggish economy is having a direct effect on the day-to-day activities of Ridenour and other M&A professionals.
``I've got three deals on the table right now - a molder, an extruder and a compounder,'' Ridenour said. ``If this were [1995-99], these deals would have closed a long time ago.''
