(Jan. 19, 3:25 p.m. EST) — Throughout 2006, one could hardly pick up The Wall Street Journal without seeing headlines announcing another big private equity deal. Companies of all sizes, in virtually every industry, were snatched up, taken over, or put on the block. Yet, the plastics industry was conspicuously absent (most of the time) from these announcements. Certainly, there were a few significant private equity deals, yet overall mergers-and-acquisition activity among midmarket plastics companies did not set any records.
To find out why M&As were only so-so last year in the plastics industry, we need to look back a little farther — to the summer of 2005. By mid-August of that year, the price of crude oil had topped $60 per barrel, up from $25 per barrel in September 2003. For the plastics industry, the squeeze was felt in rising resin prices. Then, on Aug. 29, 2005, Hurricane Katrina slammed into the coast of Louisiana and Mississippi, devastating the industry's major resin production factories. Supply dwindled, and prices jumped again.
Not surprisingly, for even the strongest plastics companies, the 2005 “numbers” were skewed. That caused a problem for investors, who value companies by looking at the prior 12-month performance. Because the 2005 numbers in the plastics industry did not help investors distinguish the “good deals” from the “bad deals,” potential buyers sat on their hands.
Now, at the beginning of 2007, we're starting to see a different picture. For the past year, the price of resin has been high, but stable. (In fact, the cost of PET has fallen dramatically.) Coincidently, share prices of select public plastics companies have taken off. These indicators appear to suggest now that midmarket M&A will come to the plastics industry. With that possibility comes another kind of pressure.
Investors want to see clear differentiation among companies because a business with a strong “value proposition” can justify increasing its prices more easily. For a resin-based enterprise without a value proposition, passing on cost increases through higher prices will be much harder to justify.
To prepare for 2007, midmarket plastics companies should be asking, “Do we provide a 'value add' to customers, whether through products, services, or some other way? Do we have a rational pricing strategy?” Of course, pricing is a complex topic, and one we'll tackle in another column.
Will Frame is a managing director with Deloitte & Touche Corporate Finance LLC in the Chicago office.