The U.S. plastics manufacturing industry has been experiencing a major consolidation that will ultimately result in an industry with fewer competitors that are significantly larger, have greater capabilities and are more global in focus. The current wave of consolidation is being driven by a number of key industry trends that will continue to shape the competitive landscape, including: increasing importance of size, scale and low-cost positioning; globalization; pursuit of more attractive product categories, end markets, customer bases and product/process capabilities; challenging competitive, capacity, pricing and input cost conditions; increasing foreign competition; increasing importance of low-cost/foreign manufacturing capabilities; technological change; and increased customer demand for comprehensive services and solutions.
M&A market valuations
Plastics mergers and acquisitions have been relatively active during the past 10 years. Since 1993, there have been a total of 6,149 global plastics M&A transactions announced with 2,455 having disclosed values aggregating $282.4 billion. In the United States there have been a total of 1,849 transactions announced with 765 having disclosed values aggregating $103.1 billion.
Company values are often expressed in relation to a company's profit (earnings before interest, taxes, depreciation and amortization) for the last 12 months (LTM).
From a valuation perspective, Robert W. Baird & Co. aggregated M&A data into two broad industry subgroups — industrial/consumer plastics, and plastic packaging. The data indicates that the median plastics sector M&A transaction valuation multiples are approximately 7.1 x LTM EBITDA (7.1 x for industrial/consumer companies and 7 x for packaging companies) and 10.4 x LTM EBIT (9 x for industrial/consumer companies and 10.7 x for packaging companies). Importantly, more recent transactions in the industrial/consumer subgroup have taken place at much lower valuation multiples (i.e., 4.5-6.5 x LTM EBITDA and 6-8 x LTM EBIT).
Baird's analysis further indicates that:
cValuation multiples in individual transactions are directly related to company and industry-specific value drivers.
cOverall plastics sector M&A transaction multiples have declined during the past few years.
cThe valuation multiples for plastics packaging companies are generally higher than for industrial and consumer companies.
cValuation multiples are closely correlated with transaction size (larger transactions typically carry higher multiples).
Public equity valuations
From a valuation perspective, plastic products companies have generally tracked the performance of “peer” nonplastics companies in their respective underlying market sectors. During the past five years, the stocks of plastics companies have, on average, declined on an absolute basis and have underperformed the broader equity market as measured by the S&P 500 and Russell 2000 indices. Within the plastics sector, the packaging firms have generally outperformed the more diversified group of industrial and consumer companies.
During the past 12 months, the stocks of plastics companies have been down modestly and have underperformed the broader equity market indices. Within the plastics sector, packaging company stocks have actually increased and have significantly outperformed industrial and consumer companies, which have continued, on average, to decline. While the equity markets have been rising during 2003, only the plastic packaging companies have participated in this increase. In the public equity market, plastics companies trade at about 6.6 x LTM EBITDA, 10.6 x LTM EBIT and 12.5 x 2004 projected earnings per share on a median basis.
Outlook for M&A
While the past few years have been challenging, we are seeing a general improvement in market tone, and we are optimistic that the remainder of 2003 and 2004 will experience a stronger pace of plastics sector M&A activity. In particular, an improvement in economic conditions should drive higher corporate profits, higher stock prices and greater corporate and CEO confidence — ideal conditions for growth in M&A activity.
In addition, we are seeing a number of factors that we expect to spur the level of M&A activity in the plastics sector. These factors include more “realistic” sellers, substantial private equity capital available for investment, an “aging” of plastics sector portfolio companies held by private equity firms, corporate divestitures of noncore plastics businesses and a continuation of distressed or bankruptcy sales of plastics companies.
While we believe that there may be more sellers than buyers, a “buy, sell or be the odd-man-out” mentality will likely persist. In our view, the next few years will be a good time for plastics companies to grow through acquisition on relatively attractive purchase terms. In addition, sellers of well-positioned plastics businesses will continue to be rewarded with buyer interest and premium valuations in sale processes, while sellers of marginal industry players may find that the M&A market, especially valuations, will continue to be challenging.
Steven M. Bernard is director of M&A market analysis and James E. Hoffman is a managing director in the M&A group at Robert W. Baird & Co. Both are based in the firm's Chicago office.