At midyear 2007, mergers and acquisitions activity in the plastics industry reflects that all end-market sectors continue to consolidate. The M&A market, by and large, is being driven by strong corporate cash flow, highly liquid capital markets, and growing participation by international players seeking purchases domestically and domestic players seeking purchases abroad.
Plastics News interviewed 12 M&A experts for this midyear report, all of whom said they've never been busier. Private equity buyers still are active, but strategic buyers are getting even more aggressive.
``It is significantly a seller's market,'' said Matt Jamison, director with P&M Corporate Finance LLC in Southfield, Mich. ``There is more money than there are sellers right now of good companies.''
By P&M's estimate, global plastics M&A activity so far this year has been fairly flat compared with one year ago, where year-to-date figures tallied up 207 deals, compared with 195 now.
``We continue to be very bullish on mergers and acquisitions in 2007,'' Jamison said in a recent telephone interview. ``It's fairly flat, but the transaction value is up significantly. The deals are bigger.''
Jamison said there are several factors affecting M&A activity, including larger companies selling in the first half and an increase in those deal valuations, thanks in part to private equity buyers.
For example, with Rexam plc's purchase of Toledo, Ohio-based Owens-Illinois Inc.'s plastics assets, the valuation on that deal was 11.3 times earnings before interest, taxes, debt and amortization.
``An 11 multiple implies a very high level of synergies and/or growth,'' Jamison said. ``I was somewhat surprised by how high it went. You really need to have one or both of those to be able to justify that price to achieve your required returns.
``It is an important deal, especially given the direction of the company. For its stated strategy, it was a must.''
Rexam's purchase is a symbol of a larger trend, according to Tom Blaige, chief executive officer of Chicago-based Blaige & Co. LLC, who said companies seeking to enter new markets, and especially to diversify their mix of materials offerings, will affect the M&A market.
``It's not only plastics getting into additional materials, but it's nonplastic getting into plastic,'' he said in a June 28 interview in Plastics News' Akron, Ohio, office. ``It's a huge trend right now, especially in the packaging space. I see packaging really picking up.''
London-based Rexam's core business was beverage cans, but it offloaded its glass business and used the proceeds to diversify further in plastics, where it had made several acquisitions before nabbing O-I's assets.
Packaging, medical and building products continue to be the most active sectors for consolidation, said several officials.
``The packaging industry remains very hot, in terms of strategic buyers and private equity,'' said Shane McDaniel, vice president with Piper Jaffray & Co., in a June 22 telephone interview.
``We are seeing more of the strategic buyers, a lot have focused on non-U.S. assets,'' he said. ``They're looking for offshore assets. They want a local manufacturing presence.''
In the world of building and construction, a sale is expected soon for Toledo-based Owens Corning's vinyl siding business. Also, J-M Manufacturing Co. Inc. of Livingston, N.J., completed its purchase within the last few weeks of PW Eagle Inc. of Eugene, Ore. The combined group now operates as JM Eagle.
``In terms of overall activity, on a net basis, it's up,'' said Andrew Bohutinksy, managing director for Chicago-based Lincoln International LLC, which specializes in building and construction.
``Cross-border activity is markedly increased, particularly from Europe and Asia,'' Bohutinksy said.
The U.S. dollar is weak compared to other global currencies, which makes U.S. companies less expensive. Comparing 2006 to 2004, for example, the number of deals by European buyers of U.S. companies has more than doubled, he said.
``In our business, we've been approached by big European companies looking to acquire U.S. companies,'' Bohutinksy said.
An area of increased activity in building and construction is nonresidential commercial construction, Bohutinksy said. There is an overall buzz of activity of companies looking to buy and sell.
``The big question is, how long will the good times continue?'' he said. ``Where are we in the cycle?''
But for those companies serving residential housing, there is lower M&A activity, ``it's a nice time to be a buyer, if you can find companies.''
``Buy now at the lower end of the cycle and wait for it to return,'' he said. ``There are not a lot of companies looking to sell right now because the prices are so low.''
By Blaige's estimate, the plastics industry is in the fifth year of an M&A up-cycle, which has delivered a seller's market fueled largely by factors specific to the plastics industry, including globalization and consolidation. The availability of significant credit and equity capital have fueled the trend, Blaige said. But he does not expect the level of activity to continue to grow - Blaige predicts a plateau or slight drop in the number of deals.
Several factors may affect M&A activity during the next 12 months, including expected increases in interest rates and tightening by banks. The economy may even slow further in the United States.
``I think the only thing buyers should be concerned about are any changes in the financial markets, any changes in the cost of borrowing,'' said Bill Ridenour, president of Polymer Transaction Advisors Inc., in Newbury, Ohio.
What officials agreed on as well is firms that are distressed and failing tend to be those that are below $50 million in sales and tend to have commodity-oriented product portfolios.
Automotive will remain sluggish in terms of slower transaction volume, and the home-building sector will be sluggish as well, said officials with Mesirow Financial Inc. of Chicago.
Will Frame, managing director in Chicago with Deloitte & Touche Corporate Finance LLC, said low-cost, functional, environmentally friendly plastics will remain a hot area.
``Consumers are driving this,'' he said in a recent telephone interview. ``Wal-Mart and others are responding. Putting your head in the sand on this issue is shortsighted.''
Also, too, firms must realize that quality of earnings is very important.
``How sustainable are the historic numbers, where is the growth, how risky is the business?'' he said. ``For plastics businesses, for example, can you pass through resin price increases or not? Typically if you can, it's a sign of higher value proposition. It indicates strength.''
In the world of M&As, strategic buyers will continue to compete for deals with private equity, Frame said.
``Right now, you're seeing strategics being very aggressive,'' he said, pointing to the recent deal in which Pactiv Corp. of Lake Forest, Ill., paid $1 billion to acquire Prairie Packaging Inc. of Bedford Park, Ill.
``Strategics have tidied up their balance sheets,'' Frame said. ``But private equity is not a flash in the pan, it's not going away. Both Pactiv and Rexam have understood this. Strategics are catching up, but private equity is still driving the valuation.''
Many private equity players want to be active in the plastics market. For example, there are firms like Spell Capital Partners LLC of Minneapolis, which has made three deals in plastics materials in the past 18 months.
``Spell Capital is building a very significant plastics business,'' said one consultant. ``Spell is happy being in Minnesota and quietly doing what they're doing.''
Greg Myers, managing director of private equity firm Mason Wells Inc. of Milwaukee, said the Rexam deal with O-I, and Sonoco Products Inc.'s acquisition of custom blow molder Matrix Packaging Inc., will spark more activity in the market. His own firm looks for niche players and family-owned businesses in which to invest, and private equity buyers have an interest in building up nice businesses.
While many private equity firms look to buy a company with borrowed money, then sell it in a few years for a profit, some are interested in being longer-term players in the plastics industry.
Mason Wells, for example, takes a extended view, seeking to build sustainable value in an acquisition.
``We're just not looking to dress it up and sell it,'' Myers said.