The exploding noise that we were supposed to hear from the mergers-and-acquisitions market was muted and at half-sizzle in the first half of 2005.
Commentaries far and wide, from the New York Times to Wall Street to those centered on the plastics industry, had said that 2005 was supposed to be The Year of the Big Transaction. In stories dating to the end of last year, analysts had said that the stars were aligned for the money to flow: Interest rates were low, bank credit was high, and private equity firms had bushels of cash and were paying attention to the plastics industry.
But looking back on the definitive deals for the first six months of this year, only a few blockbusters emerged. There was little water-cooler talk about transactions that were changing the industry's shape.
There were exceptions, but it generally was not a period when the art of the deal was the talk of the town. Yet, even without that exploding matter from M&A activity, the market still is robust and poised for a good second half, said Kenneth Brooks, senior vice president of Ernst & Young Orenda Corporate Finance Inc. in Montreal.
``There haven't been a whole bunch of big deals, but there are a number of transactions in development,'' Brooks said. ``They could hit in the third or fourth quarter, in terms of when they close. Providing they come to fruition, the year could turn out very well.''
Brooks brought up a key point that has occupied M&A experts throughout North America. While not all expected transactions closed in the first half of 2005, many companies were shopping. There was a glut of activity among possible sellers, many of which had hired investment firms and put together presentations for potential buyers, Brooks said.
For various reasons, there was a lot of noise made by sellers, but not as many transactions consummated as expected, Brooks said.
No single reason could account for the lack of consummated deals. Sometimes, those companies did not fetch the valuations they had targeted for a sale, and sometimes transactions took longer than anticipated to close. In a few cases, companies just decided it was not a good time to exit the business.
Yet, some companies are getting phone calls almost weekly from potential buyers, many backed by private-equity money, Brooks said. It is a busy period, even if not all deals are brokered and signed, he said.
``We don't expect to see an explosion per se,'' Brooks said. ``But I do think we are close to the high point in the cycle from a valuation perspective. We'll end up seeing deals that just won't close and never get consummated. But others are still looking at options and at least listening to active solicitations for their business.''
The busiest markets for M&A activity continue to be packaging, health care and pharmaceutical, and building and construction, said Brooks and others. Automotive, an industry that has seen its share of struggles by large carmakers and top suppliers, is more challenging. In that business, there are as many distressed properties on the market as healthy ones, Brooks said.
Those troubled automotive properties are tending to drive down valuations in general, said Jeffrey Kolke, vice president of chemicals and plastics for GE Corporate Lending in Chicago. Companies generally are selling for 4-6 times earnings before interest, taxes, depreciation and amortization, or EBITDA, Kolke said. That valuation is a little more for some deals, especially a few in packaging, but is less in the automotive sector, he said.
Outside automotive, others have fared better. A look at the largest plastics processing deals in North America for the first six months of this year show half of them with packaging ties. Others also emerged.
A major pipe deal, with Advanced Drainage Systems Inc. buying Hancor Inc., is expected to close soon, and medical and consumer products injection molder Tech Group Inc. just sold its business to West Pharmaceutical Services Inc.
Many of those large deals occurred in the second quarter. That includes a transaction announced June 27, when Quadrant Engineering Plastic Products of Reading, Pa., bought shapes maker Poly Hi Solidur Inc. Poly Hi recorded sales last year of $169 million and has more than 1,000 employees, qualifying that sale as a major one in plastics.
Still, the cash for deals is not flowing as freely as it did in the fourth quarter of last year, Kolke said. Figures compiled by GE show a huge spike in leveraged loan volumes in the plastics industry for the fourth quarter: Loan volumes were hiked more than fourfold, to $5.35 billion from $1.08 billion in the third quarter last year. Those loans were used both for transactions and for corporate refinancing, Kolke said.
They also prompted analysts to expect a huge 2005 for acquisitions. But so far, refinancing has outweighed transactions, he said. Loan volume has shifted downward again, to $1.87 billion for the second quarter this year. And with companies having greater liquidity and more cash to spend, they have turned to shoring up capital instead of looking at deals, he said.
``We saw the big spike [in loan volume] for the fourth quarter and were thinking this year would continue on that path,'' he said. ``But this year, the market for acquisitions is not as strong as last year. There's more refinancing activity than in the past.''
Last year was healthy but no different than in 2003, said Thomas Blaige, chief executive officer of Chicago-based Thomas Blaige & Co. LLC. His firm's research shows 359 transactions for packaging, materials and industrial products completed globally in 2004; in 2003, 369 deals were completed in those areas.
Yet, Blaige said that valuations are cresting now and companies are pushing hard to get a high multiple for their businesses. He expected the second half of this year to pick up steam.
``We have a bunch of things in the market now, and we've met with twice as many companies in the first half of this year as ever before,'' said Blaige, who runs an equity firm focused on plastics companies. ``We're working on deals involving 15 companies and running around like chickens with our heads cut off. Looking at that, we think 2005 is still the year for many companies to sell.''
Outside North America, transactions are spiking at a sharper rate, Blaige said. That includes PVC profile and sheet maker HT Troplast AG of Troisdorf, Germany, which is being acquired by a U.S.-based equity group consortium. Large deals also involved packaging companies: Minneapolis-based Bemis Co. Inc. bought Dixie Toga SA in Brazil and Tyco Plastics in Princeton, N.J., sold off several British plants, Blaige said.
In North America, future expectations are greater than current M&A results, said Matt Jamison, director of the plastics and packaging group for Southfield, Mich.-based Plante & Moran Corporate Finance LLC.
Last year was fairly lackluster for M&As, but was helped by several large deals near the tail end of 2004, Jamison said. This year also has been fairly flat but could become interesting in the second half, he said.
``The backlog of deals that are coming to the market continues to increase,'' Jamison said. ``What's bubbling or percolating signifies a significant increase over six months ago. It's happening broadly across the plastics industry and starting to heat up.''
Jamison said that a number of companies are preparing for a sale or looking for acquisitions. Many of those companies are in the middle-market, with annual sales of under $500 million, he said.
Those firms know they need to expand or sell, he said.
Even in automotive, a prickly segment at the moment, several healthy firms are looking for buyers, Jamison said. They include Carlisle Engineered Products Inc. of Crestline, Ohio, and Sarnamotive Blue Water Inc. of Marysville, Mich., he said.
If a company is serious about a sale, now is the time to look, said Bill Ridenour, president of Polymer Transaction Advisors Inc. of Newbury, Ohio. Right now, companies with annual sales in the range of $50 million to $100 million are fetching 6-7 times multiples of EBITDA, while larger companies are getting upwards of 5-8.5 times EBITDA, Ridenour said.
That boom in valuations might not last longer than the next six to nine months, he said. Loan rates are rising and so are prices for materials and goods, he said. That should eventually affect profit margins and acquisition activity.
``We don't see it any better or any worse for acquisition activity in the short term,'' he said. ``Beyond that, all bets are off. We're not clear how long the strong economy we have now will last, so any company considering a sale should do so now,'' he said.