The world of plastics packaging is dominated by private equity and that trend will continue in earnest, according to industry experts.
The packaging industry, once defined by Smurfit-Stone Container Corp., Exopack Holding Corp. and Cello-Foil Products Inc., now is made up of firms like Sun Capital Partners Inc. or Texas Pacific Group Inc., as one observer pointed out.
In essence, private equity groups represent the new leaders, and that is expected to continue, especially as large assets representing platform entries into different markets are available for purchase.
Private equity, as defined by Ernst & Young Corporate Finance Inc. in Montreal, is a pool of capital coming from limited partners to make investments in a variety of industries. The money is derived from sources such as large pension funds, endowments, universities and life insurance firms. Some forms of private equity even might bring turnaround experience, as in the case of Sun Capital.
Investors need to put that money to work, and they're very interested in packaging, a stable industry with fairly good margins. And it's a sector that's easy to understand, said Ken Brooks, senior vice president at Ernst & Young.
``[Private equity] is here to stay. Get used to it. It's not going away,'' Brooks said.
To put it in numbers: Private equity accounts for more than 20 percent of all mergers and acquisitions. But that number comes closer to 33 percent after adding platform and bolt-on acquisitions made by private-equity-backed players.
That may come as no surprise to the plastics industry, which has seen the wave of private equity money for years. But now, fund managers looking to put dollars to work are changing the packaging market landscape, consolidating a historically fragmented industry and taking companies global.
Large assets are on the buying table, including the European PET business of Amcor Ltd. of Melbourne, Australia, and the remaining plastics assets of Owens-Illinois Inc. of Perrysburg, Ohio. Some experts expect both assets to go to private equity players.
``Amcor really hasn't had a lot of impact on private equity, but ... they announced they were going to look at the divestiture options for their PET business in Europe,'' Brooks said in a March 1 presentation at Packaging Strategies in St. Petersburg. ``Well, I don't know if you know who the PET players are in the world, but there really isn't anybody big enough that's going to be able to buy Amcor's PET business that is a strategic player. So the likelihood is that business is going to go to a private equity group.''
Brooks cited Berry Plastics Corp. as an example of how private equity can benefit a firm. In 1990 Berry was a $50 million business under private ownership, Brooks said. Under various forms of private equity ownership since that time, Berry was sold to its current private equity owners last year at a multiple of 8.6 times earnings before interest, taxes, depreciation and amortization.
``Apollo could have done the deal by itself,'' Brooks said of the partnership between Graham Partners and Apollo Management LP that bought the business in 2006.
``Apollo was a $15 billion private equity fund. However, Apollo teamed up with Graham because the principals at Graham are the same people who had started Graham Packaging. So they brought an industry angle to the equation to help out Apollo.''
With Berry now at $1.4 billion in sales, Brooks believes Apollo and Graham will look to boost it to a $2.5 billion business via acquisition. Berry has not made any acquisitions since its new owners took control.
``The big question here becomes: Who is Berry Plastics going to acquire?'' Brooks said. ``O-I would be an interesting target.''
In a March 7 telephone interview, Berry Plastics Chairman and Chief Executive Officer Ira Boots said, in response: ``Those comments are not authorized by the company and we have no comment.''
Still, private equity involvement has its drawbacks, Brooks said. He cited Plassein International Corp., which in 2000 rolled up six flexible packaging companies but lacked an effective integration strategy. The firm filed for bankruptcy protection in 2003, subsequently selling four plants and closing two others.
``Berry and Plassein are two different examples of what can work and what doesn't,'' Brooks said. ``Within the Plassein example, you basically have six owner-operators, all with their respective egos, that came in together and tried to make something work. Not going to happen. Not when you have six egos competing for air time.''
Firms need to be savvy in the ways of private equity for exactly such reasons, officials said. Across the global packaging chain, buyouts are prevalent as the industry continues its consolidation, reflecting a need to get bigger or find a niche to stay ahead of competition.
``The challenge in terms of necessity is to be an elephant or to be a mouse,'' said Ben Miyares, vice president of industry relations for the Packaging Machinery Manufacturers Institute in Arlington, Va. ``Anything in the middle will be squeezed out.''
``Get big, get small or get out,'' Miyares said at Packaging Strategies. ``If you're big, you can survive on power. If you're small, you better have a niche. You better have a specialty. You better have an exclusive. If you don't have either, you're just one of the pack and, chances are, you're not going to be around that long.''
It's those niche players and family-owned businesses that attract private equity companies like Mason Wells. The Milwaukee firm looks for such companies that principals can build to the next level, said Managing Director Greg Myers. Mason Wells invested in private-label packaging maker Sturm Foods Inc. and held on to it for six years before selling, in 2005, to another private equity firm. That activity represents an industry trend that will continue, Myers said.
``Historically, we have not sold to private equity funds,'' he said. ``It has not been a high priority for us. We've never bought from a private equity firm. But that is a trend. There are a lot of firms out there. They're increasingly active. Now, private equity firms are every bit as competitive.''
What has fueled the trend over the past few years is a combination of aggressive credit markets, a significant reduction in U.S. prime rates and the ability to raise enough equity, Brooks said.
``They're very different in their approach to transactions,'' he said. ``They come at it with a very clean balance sheet. Their equity is a commodity. They can structure a transaction very differently than a strategic player.''
Those factors have fueled a significant increase in deal valuations. As a standard metric, a transaction is evaluated by a pricing multiple in terms of EBITDA. Brooks said average deal valuation will range between six to eight times EBITDA.
Moreover, industry experts believe that packaging companies can benefit from a private equity group's tendency to look broader term.
Two-thirds of all private equity firms are performing at about the same level as the stock market, according to Brian Wagner, vice president and chief operating officer of Packaging & Technology Integrated Solutions LLC of Kalamazoo, Mich. And the top 25 percent of those are outperforming both Wall Street and their peers in the marketplace.
``We see that having a significant influence on our industry,'' Wagner added.
For publicly traded firms, the tendency is to watch performance quarter to quarter, whereas in a private equity fund, the outlook tends to be five years.
The drawback to operating under a public company can be twofold. ``Either you're watching something that shouldn't be watched because the CEO needs some news in the marketplace, needs to tell the analysts something or, alternatively, you've got some great new product that they're not launching because the numbers don't somehow work out within their formula,'' Wagner said.
Officials from large publicly traded companies said though private equity may have its place at the table, public businesses will do what it takes to stay ahead of the game. But a climate of corporate scandals and the operating expenses of complying with the Sarbanes-Oxley Act and similar measures have partially created the current environment, said David Hoover, CEO of Ball Corp. in Broomfield, Colo.
Private equity isn't necessarily going to lead the industry out of the desert, he said. One of the drawbacks is its entry-exit mentality, and the ultimate challenge is how a company balances short- and long-term planning.
``We're all competing for capital,'' he said in a Feb. 28 address to Packaging Strategies attendees. ``[Private equity] in packaging is not a new idea. I just see it as what it is. It's a situation - it's happening. PE players, like all of us, want to make a return. If a private equity firm is consolidating, it's good for larger players.''
In 2006, Ball made its own significant plastics acquisition by purchasing the barrier polypropylene bottle assets of Alcan Packaging, paying $180 million in cash. That move hasn't necessarily started Ball on an acquisition frenzy in plastics, Hoover said in a Feb. 28 interview. ``We tend to be a buyer when we think it can create value. We don't force it,'' he said.
Sealed Air Corp. CEO Bill Hickey added that private equity's activity now is a future opportunity for public firms like his.
``Private equity is bringing consolidation - which is good,'' Hickey said during a panel discussion at the conference. ``They're going to eventually sell those assets, and we'll be prepared.''