If predictions by industry experts hold true, the 2007 market for mergers and acquisitions in plastics will be on fire with activity led primarily by private equity groups, with strategic buyers following closely behind.
Resin prices are trending down, and there's a glut of private equity money and a looming threat of capital-gains rates changing significantly with the 2008 presidential election stateside. The consensus among several executives is that there's more confidence in executives' earnings and the most active sector will be the middle market - deals involving businesses with $25 million to $500 million in sales.
Global activity will increase both for North American firms growing into regions like Europe and Asia and the opposite, as firms based in those regions sweeten up their holdings in North America.
Lackluster segments will include residential building and construction, and of course, the automotive sector, according to several sources.
``With resin prices leveling out, people are returning to profitability. We still have a good economy. The time is now,'' said Ben Hall, vice president with financial services firm RSM EquiCo Inc. in Costa Mesa, Calif.
``Packaging is always good,'' he said. ``Automotive is going to continue to be difficult. I don't think the Big Three will have themselves figured out any time soon.''
But those looking to sell operations in the United States better have value-added propositions that make products stand out in the market, officials cautioned. Hall pointed to Hampson Industries plc of Brierley Hill, England, which has acquired three composites firms within the last two years in California alone. The firms are focused on highly engineered components that give Hampson a competitive advantage in markets like aerospace.
``They still have an appetite,'' Hall said of Hampson.
Packaging ranked high as a sector where the industry will see the most activity, as did medical.
The plastics industry already has seen a boon of activity in the North American market in the first few weeks of 2007. General Electric's GE Plastics unit is on the block, with experts predicting it will be picked up by a private equity player. The North American pipe market will be shaped by the merger of mega firms J-M Manufacturing Co. Inc. of Livingston, N.J., and PW Eagle Inc., of Eugene, Ore. In packaging, Owens-Illinois Inc. of Perrysburg, Ohio, is looking to shed its remaining plastics business to focus on core glass operations.
``I think that we're at a time right now that we have never seen in the past as it relates to private equity,'' said Matt Jamison, director of the plastics and packaging team at P&M Corporate Finance LLC in Southfield, Mich.
The amount of capital available right now is a record, with U.S. private equity firms raising $215.4 billion in 322 funds through 2006, according to the Wall Street Journal.
``That supply of capital needs to be put to use,'' Jamison said. ``Packaging in general is a very attractive market in private equity. When you look at what private equity is trying to accomplish, they look at market growth, noncyclical end markets, strong cash flow and strong barriers to entry.
``When you look at plastics and packaging, you have those attributes across the board,'' Jamison said. ``But in areas where offshore threats come into play, that you're not going to see much investment in.''
In the plastics industry itself, any potential sellers will be affected by how well they were able to manage passing through resin price increases, even in the volatile year that was 2005. The packaging sector provides a good example of how margins have been challenged through the years:
* According to Montreal-based BMO Capital Markets, median gross margins of plastic packaging companies deteriorated from 20.8 percent in 2001 to 18.4 percent in 2005. During that same period, average resin prices (including PET, high and low density polyethylene, polypropylene, polystyrene and PVC) increased an average of 73 percent.
* In 2005, resin prices increased sharply as a result of shortages caused by the hurricanes. That drove a gross margin decline of plastic packaging companies from a median of 19.2 percent in 2004 to 18.4 percent in 2005.
* In 2006, resin prices retreated during the first half by an average of 11 percent, which resulted in a rise in plastic packaging gross margins to 18.7 percent.
``We have a nice run where buyers can look back and see were they able to do it or not, in terms of whether or not companies were able to pass through price increases,'' Jamison said. ``Companies that have not been able to do so in the past, they're going to be less likely candidates for private equity than those that can.''
Eric Malchow, managing director of Lincoln International LLC in Chicago, said that his firm advised a number of companies that they needed to make sure price increases were passed on to customers and to wait to sell their companies until those increases were reflected on balance sheets.
Still, 2007 should be strong both with strategic acquirers and private equity firms.
``People talk about the perfect storm,'' Malchow said. ``I like to talk about the perfect sunny day, from the standpoint of selling a business. You have record private equity being raised year in and year out; that needs to be put to work. There is significant capital being raised in the middle market. Public companies are flush with cash and are seeking to make strategic acquisitions. Strategic acquirers are flush with cash.''
But officials with auction house Stopol Inc. of Solon, Ohio, said not all is rosy with the plastics industry. The market will see a lot of activity in mergers and acquisitions in 2007, but financial results vary across the industry and there will be a lot of consolidation.
``We have seen, really, in the last 18 months - resin prices have helped - but it still appears that there's only 20 percent of the market that is really excelling and making a good profit and doing well,'' said Don Kruschke, executive vice president with Stopol and director of its thermoforming division.
``There are 50 percent that are breaking even, and 30 percent are in financial hardship,'' he said.
The industry will see a lot of activity among injection molders, especially those involved in automotive, big appliance and consumer sectors in North America. Thermoforming will experience a lot of consolidation as well, officials said, especially in higher-volume food-container packaging.
Officials said to expect more consolidation in the housewares sector because of market trends. Also, Stopol officials know of 17 plant liquidations that will be occurring in the next two quarters across the plastics industry in North America. Though the lion's share is injection molding, there is some extrusion and blow molding, they said.
One of the cyclical areas that may see less interest from private equity is building and construction, according to Andrew Bohutinksy, senior vice president with Lincoln International. Especially on the residential side, that market will be impacted by the expected decline in housing starts.
Therefore, any processor whose business is tied to residential will see decreased acquisition interest from private equity players in 2007 vs. 2006.
``There are private equity firms that have retrenched because a lot of them are realizing that it's a cyclical business,'' Bohutinsky said.
``They're also being pressured from lenders. It's impacting multiples. It also has scared some people off as well. They want to see how this housing correction turns out.''
The area may be a target for European strategic acquirers seeking to expand in North America, especially in segments like vinyl windows. Bohutinksy said any residential downturn isn't impacting them because they're looking at any acquisition as a long-term investment.
``As 2006 went on, we saw more and more activity from foreign acquirers,'' he said. ``If you look at our deals for 2006, almost half of them involved foreign buyers or sellers. It really is a trend that is taking off.''
In nonresidential construction, Bohutinksy said his firm expects 2007 M&As to pick up vs. 2006, especially in segments like pipe.
``Some of the larger pipe companies in Europe, some of those larger companies, we're seeing increased interest from them in expanding in North America,'' he said.
Those European companies also are being pushed along by the value of the euro, RSM EquiCo's Hall said.
``Where these businesses can find niche opportunities that are strategic fits, they're paying significantly more, but today, they're just being competitive based on the euro,'' he said. ``They've got a bit of a leg up right now.''
In North America, the market also is being affected by threat of capital gains rates changing significantly with the 2008 presidential election in the U.S., according to Hall.
``There's going to be a rush to the market by a lot of business owners,'' he predicted.