With the notable exception of the automotive segment, 2007 remains a seller's market for those looking at plastics mergers and acquisitions.
Global plastics M&A activity has more than doubled since 2002, with the number of deals growing from 198 in 2002 to 425 last year, according to Thomas Blaige, chief executive officer and managing partner of Blaige & Co. The Chicago-based investment banking firm has tracked activity in that area since 2002.
Injection molding accounted for 26 percent of those deals in 2006, taking up the largest market share, Blaige said at the 2007 Plastics News Executive Forum, held Feb. 25-28 in San Diego. Of last year's deals, 39 percent were U.S.-based. By comparison, U.S.-based deals held a 50 percent market share in 2002.
``Deal volume is skyrocketing,'' Blaige said. ``There's been a lot of middle-market activity. All sectors are consolidating, and private-equity funds and open credit markets - where banks are lending aggressively - are fueling this consolidation.''
At the forum, Blaige led a panel discussion with M&A veterans Ira Boots, Jeff Dancer and Michael Lord.
Boots - chairman and chief executive officer of processing giant Berry Plastics Corp. in Evansville, Ind. - is certainly no stranger to the M&A world. In the nearly three decades Boots has been with Berry, the firm has purchased and integrated 22 companies. The pace quickened in 1990 when Berry took on its first private-equity partner.
``In 1990, we reached out to a private-equity partner in order to compete with the global companies we were going up against,'' Boots said. ``We went from $57 million to $250 million in sales in the first five years.''
Berry kept on growing from there, and posted sales of almost $1.5 billion in 2006. Its sales almost have tripled since 2003. But Boots tries to look at his firm's success in simple terms.
``We make buckets,'' he said. ``It's not rocket science. We see a margarine bowl or a bucket of cookies and we think money. We've been able to pick up niches along the way, but our core business is still making buckets.
``If we get an automated order, we'll win it 95 percent of the time. But if it's specialty work that needs to be handled, we'll lose it 95 percent of the time.''
Boots also observed that the trend in plastics M&A ``is toward private equity.''
``The way we see life is, you're either a platform company and growing, or a bolt-on acquisition to one of us,'' he explained.
Dancer agreed with that trend, pointing out competition between private-equity firms and strategic buyers within the industry are driving up selling prices and multiples for many plastics companies.
``If you're a strategic buyer, you think, `What makes a private-equity company think they can run this business better than we can?''' asked Dancer, a 25-year petrochemical industry veteran who's now president of Allen F. Dow Group, a consulting firm in Houston.
``Private equity wants to get in, ratchet it up and flip it,'' he said. ``Strategic buyers are now saying they have to get busy and find someone to buy before private equity gets in and drives the cost up. What's going to happen is that prices will go up until multiples are too high and private-equity companies say it's too much risk.''
On the other end of the spectrum is Lord, president and chief executive officer of Blue Water Automotive Systems Inc. Blue Water, an automotive injection molder, is owned by New York financial group KPS Special Situations Fund LP. Lord, a turnaround specialist, was brought in by KPS in October. In early December, the firm announced the closing of three of Blue Water's nine plants.
``My job is to get [Blue Water] to survive and prosper in an industry that's going sideways and backwards,'' Lord said. ``We want to bring common sense into an industry that's lost it.
``Ninety percent of our business is with the Big Three. Most companies like us aren't in a seller's market - they're discounted asset values and would be lucky to get four times earnings if sold.
``In that sense, private-equity firms are the ultimate activist investor,'' Lord added. ``You get good input, but they're also very demanding of returns. Thankfully, the amount of transfer business in automotive right now is incredible. That's providing some sign of rationality in the market, in that firms know they have to make money.''
Unlike the automotive field, deals in other plastic segments can fetch much more, according to Boots.
``The top end right now is 10 times earnings. You can get 75 cents on every dollar of revenue if you're a plain-Jane bolt-on that has to survive as part of a bigger company. Bigger and better firms could get 2-2½ times revenue.
``What's also complicating the picture is that the endowments, universities and retirement funds that make these investments now are looking at more than 3-5 percent annual returns,'' Boots said.
The size and scope of some of the players in the private-equity field have skewed the perception of the marketplace, according to Dancer. He cited the example of Washington-based Carlyle Group, which has been mentioned as a possible bidder for GE Plastics.
``Carlyle Group employs 200,000 at the companies it owns and has $68 billion in revenue,'' Dancer said. ``They've got $1.6 trillion of buying power. There's a seemingly unstoppable flow of money.
``Higher multiples will go to companies with better profit throughout the cycles. Ones with low debt also will get higher multiples.''
The speed at which private-equity funds move also takes a little getting used to, Lord said.
``With the current owners of a firm, there's usually denial about the condition of their business. People will keep a factory open because they think it's going to get some business. They'll think it's going to get better,'' he said.
``But with private equity, you have to be able to react really fast. You have to challenge every single line item.''