PHOENIX (Feb. 3, 1:35 p.m. EST) — The market for plastics mergers and acquisitions should pick up in 2003 after a couple of not-so-great years — but M&A still is not an area for the faint of heart.
That was the vibe given off by a panel of three processing executives — Precise Technology Inc.'s John Weeks, Titan Plastics Group Inc.'s Greg Botner and KlÃ¶ckner Pentaplast of America Inc.'s Tom Goeke — whose firms have been active M&A players in recent years.
M&A professionals Tom Blaige of Lincoln Partners LLC and Jeffrey Kolke of GE Commercial Finance Inc. — who moderated the panel at the 2003 Plastics News Executive Forum, held Jan. 26-29 in Phoenix — agreed that the market appears to be heading up in early 2003.
“M&A is essential to the continued success, and even survival, of the industry,” said Blaige, managing director of Chicago-based Lincoln Partners. “If you can't grow, you may need to leave.”
The number of global plastics M&A deals dropped 7 percent to 198 between 2000 and 2002, as leveraged buyout prices dropped to pre-new economy levels. The number of investors and lenders involved in 10 or more plastics deals each year also dropped from 110 in 1999 to 39 in 2002, indicating that less financing was available, according to Kolke, a Chicago-based vice president with GE Commercial Finance.
Kolke said he expects multiples — which in 2002 had bottomed out to seven to eight times earnings before interest, taxes, depreciation and amortization for custom injection molders and five times earnings for general-purpose molders — to continue ticking up in 2003.
But the M&A panelists were quick to point out that an improving market does not always equate to a smooth ride.
“It's easy to get caught up in the auction and bidding process and lose track of why you're involved,” said Goeke, president and chief executive officer of Gordonsville, Va.-based extruder KlÃ¶ckner. “You have to learn when to say no.”
In the past two years, Goeke's firm has acquired film extrusion businesses in Ohio and Portugal and itself has been acquired by Cinven Ltd. of London.
Botner, president and chief executive officer of Portage, Mich.-based Titan, described lack of focus as “one of the biggest risks” in the M&A field.
“If you're going to make changes [after making an acquisition], you need to make them quickly,” said Botner, whose firm was formed in 2001 when Charter Oak Capital Partners LP — which already owned injection molder Wollin Products Inc. — acquired injection molder Plastic Engineered Components Inc.
After assuming the Titan name, the combined firm quickly consolidated 16 plants into nine.
“You can't allow bad situations to fester or allow people who aren't on board to linger,” Botner added. “And your capital expenditure plans have to be carefully thought out and executed.”
Acquiring a larger firm can provide a different set of challenges, according to Weeks, president and chief executive officer of Precise, an injection molder in North Versailles, Pa.
Weeks compared Precise's 1996 purchase of much-larger Tredegar Molded Products to “drinking from a fire hose.” Within 30 days of the deal's closing, Precise had replaced a dozen Tredegar executives; and within 60 days, two Tredegar plants and one Precise plant were closed.
But Weeks added that those moves were expected because Precise — which has been involved in eight deals since 1990 — “had done [its] homework.” Late last year, Precise purchased Courtesy Corp. out of bankruptcy.
Market prospects for 2003 could be improved by an increase in “what's available to look at” brought about by higher multiples, KlÃ¶ckner's Goeke said. Weeks added that deals might be available as buyers “pick up the pieces” of earlier deals that did not work out.
Botner said he expects the rate of activity to increase as “general confidence” is restored, but he added that ongoing industry overcapacity is making him less sure that multiples will increase.
Recent financial scandals should make due diligence tougher and deals more complex in 2003, Blaige said. Sellers in 2003 should include original equipment manufacturers looking to divest, as well as private equity and corporate owners, according to Blaige. On the buy side, both strategic and financial buyers should be active in 2003.
Weeks — a 35-year plastics veteran who won numerous laughs with his irreverent approach to the topic — summed up the hit-or-miss nature of the M&A market as the session drew to a close.
“I'm always fascinated," he deadpanned, "how much equity sponsors know about injection molding — after three or four weeks of investigating.”