SUMMERLIN, NEV. (Feb. 10, 11:05 a.m. EST) — There's money out there in the plastics mergers and acquisitions market, and valuations are on the rise, according to a panel of M&A pros and executives from companies in the acquisition hunt.
“There's been so much private equity on the sidelines for so long that it's created a supply/demand situation where there aren't a lot of good companies that stay on the market for very long,” said Larry Mehren, managing director with P&M Corporate Finance LLC in Southfield, Mich. “Equity buyers are sitting on capital and they need to invest.”
Mehren, who spoke at the Plastics News Executive Forum, held Feb. 1-4 in Summerlin, added that the situation is driving up valuations for plastics firms.
“If you have seven strategic buyers and seven equity buyers, you'll get much better offers from the private equity side. It's the complete opposite of five years ago.”
Current values for plastics firms range between five and 6½ times pretax earnings, according to Stewart Kohl, Cleveland-based managing general partner at Riverside Co., a private equity firm that's made 16 plastics acquisitions since 1988.
Marcel Fournier pegged current multiples a little higher, at six to 6½ times pretax earnings, with some going as high as eight to 8½. Fournier is managing director with Castle Harlan Inc., a New York private equity firm. Castle Harlan bought thermoformer Associated Packaging Technologies in late 2000 and in the next three years opened two new plants.
In plastics M&As for 2004, Fournier foresees “tremendous opportunity” in plastic packaging — ranging from film to containers — and aerospace. Medical-device molders and businesses that are collocated with a major customer are highly desirable and could fetch multiples of seven to nine times pretax earnings, added Mehren.
At the other end of the valuation curve are many automotive-focused injection molders.
“The typical injection molder for automotive isn't a very valuable commodity right now, unless they've got price leadership or are a technology leader,” Mehren said. “There's a low barrier to entry, and it's not getting higher; it's going down. And pricing pressure is just brutal.”
Fournier was more blunt in his assessment of the automotive market.
“In automotive, there's a lot of overcapacity, so customers are basically wringing everybody's neck,” he said.
Spartech Corp., a major sheet maker and compounder based in Clayton, Mo., and Sarnamotive Blue Water Inc., an automotive injection molder in Marysville, Mich., each are on the lookout for more acquisitions, officials with those companies said.
Spartech has made 21 acquisitions since 1993. During the 1990s, two-thirds of the firm's growth came from acquisitions, and the firm today boasts annual sales exceeding $950 million.
Potential targets can make themselves more attractive to Spartech in a number of ways, according to Bradley Buechler, the firm's chairman, president and chief executive officer. Those ways include:
* Getting key customers under contract.
* Addressing environmental concerns.
* Not abandoning capital expenditures.
* Preparing realistic one- to two-year projections.
* Getting top management prepared for an ownership change.
Swiss-owned Sarnamotive, meanwhile, wants to add to its stable of eight plants. As the company looks to grow, customer diversification “is the key thing, rather than size,” according to Doug Chapple, the firm's president and chief executive officer.
And although there's already been a good deal of consolidation in the plastics market, Mehren said there's room for more, since only 400 of North America's top 5,000 plastics-oriented firms, including processors and compounders, have annual sales of more than $100 million. Additionally, capacity utilization by North American injection molders has declined, on average, from 55 percent in 1998 to its estimated current level of 38 percent, according to Mehren. But overall, the wider M&A market has recovered from the “low point” of 2002, according to Jim Hill, managing partner with Cleveland law firm Benesch, Friedlander, Coplan & Aronoff LLP.
Private equity firms in the M&A game have lowered their sights, however. Where they once looked for targets with annual returns of 35-40 percent, they're now content with returns of 22-28 percent, Hill said.