Major run-ups in resin and raw material prices might be scaring away would-be investors in plastic materials firms.
And what's more frustrating about that scenario - for both buyers and sellers - is that there's still money out there looking for good investments in 2006, according to investment pros Stewart Kohl and Jeff Dancer.
``The [mergers and acquisitions] market remains strong, driven by a strong economy and banks that have been very accommodating,'' said Kohl, managing general partner of Riverside Co., a Cleveland-based private equity firm.
``But in different sectors, like plastics, high energy costs are affecting raw material prices. The issue is which direction the price is going and how soon will it get there. If the price is stable, an investor can plan accordingly, but if prices aren't stable, that's more difficult.''
For Dancer, president of Houston-based M&A consulting firm Allan F. Dow Group, surges in resin pricing during the second half of 2005 affected deals his firm was working on for a polyethylene pipe maker and a PE blown film producer.
Investors looking at the pipe maker did not know how to analyze the firm's earnings because of the resin situation, Dancer said. The film producer only was able to start acquiring a similar firm because of its familiarity with the market and because it began the process before the second-half price explosion, he added.
``There's a huge amount of money available for [investment] projects,'' said Dancer, who has more than 25 years of experience in the petrochemical sector. ``But the number of quality deals appears to be spottier.
``People don't want to take any action until they see where raw materials are going. The run-up in raw materials has hurt M&A more than any one factor.''
At Riverside, several companies in its portfolio - including surface maker Connor Sport Court International, orthopedic product maker Florida Orthopedics and seal maker Stoffel Seals - are affected by high resin prices. Overall, Riverside has made 16 plastics acquisitions since 1988.
Riverside's Kohl added that his firm still is interested in the plastics sector in spite of the raw material situation.
``Every market, not just plastics, seems to have more investment capital than investment ideas,'' he said. ``There's more money available than good companies to invest in.''
Recent activity in materials M&As seems to support an observation made by both Kohl and Dancer - that strategic investors from within the industry have been more active lately than equity investors.
The only blockbuster deal in the second half of 2005 was Lyndhurst, England-based Ineos Group's $9 billion purchase of the Innovene LLC polyolefins and olefins business from British Petroleum plc of London. BP had been shopping Chicago-based Innovene since early 2004 before Ineos - a British specialty chemicals firm - made its offer in October.
Aside from that move, smaller deals have held sway. Those include:
* Concentrates maker Americhem Inc. of Cuyahoga Falls, Ohio, buying Color and Additive Technologies Inc., a smaller concentrates maker based in Dalton, Ga.
* A management buyout creating Fiberfil Engineered Plastics Inc. in Stoney Creek, Ontario. Three longtime executives bought the plant and business, which makes glass- and mineral-filled compounds based on polypropylene and nylon, from DSM Engineering Plastics Inc. of Evansville, Ind.
* BASF Corp. of Florham Park, N.J., acquired part of the engineering plastics compounding business of Lati USA Inc. The purchase did not include any property, machinery or other assets.
* The Noveon unit of Wickliffe, Ohio-based Lubrizol Corp. bought a vacant compounding plant in Peachtree City, Ga., from Equistar Chemicals LP of Houston. Noveon will use the plant to make chlorinated PVC and cross-linked PE.
``These deals are more strategic than a venture capital firm coming in, spending money to fix up a company, then selling it for a profit,'' Dancer said.
Also in 2005, New York private equity firm Barington Capital Group LP bought a share of almost 9 percent in the common stock of compounder/distributor A. Schulman Inc. of Fairlawn, Ohio. Barington began calling for change in Schulman's strategy and management, but those calls quieted down in October when Schulman announced a stock buyback of at least $175 million and added Barington chief James Mitarotonda to the firm's board of directors.
Moving into 2006, initial public offerings could be on tap for commodity resin and pipe maker Formosa Plastics Corp. USA of Livingston, N.J., thermoset resins maker Hexion Specialty Chemicals Inc. of Columbus, Ohio, and specialty plastics and chemical maker Arkema Group in Philadelphia. Each of those firms had named 2006 as a target date for their IPOs, but have provided no further details.
