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February 15, 2008 01:00 AM

Consolidation continues in '08

Louis W. Mitchell
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    (Feb. 15, 2008) — After a record-breaking year of mergers and acquisitions activity in 2007, there are concerns that the threat of recession, compounded by the Wall Street credit crunch, may postpone consolidation in the plastics industry. While those beliefs are understandable, let's take a closer look at what drives consolidation and how a slowdown in the economy might affect M&A activity in 2008 and beyond.

    Consolidators seeking growth and synergies have driven M&A activity in the plastics industry. A number of other consolidation drivers also affect the growth and synergy dynamics.

    While certain businesses catering to higher-growth end markets, such as medical/pharmaceutical and home-meal replacement, are still enjoying rapid growth, the reality is expansion in the broader plastics market has matured and is mostly in line with gross domestic product.

    In an effort to demonstrate continued growth to its investor base, the consolidators have made growth by strategic acquisitions a popular way of supplementing organic development. Many of the active industry consolidators such as Bemis Co. Inc., Pactiv Corp. and Sealed Air Corp. use purchases as a key avenue for growth. The struggling economy also highlights the importance of growth via acquisitions.

    In addition to maturing growth, plastics converters have been facing a convergence of events that have resulted in continued downward margin pressure. Some of the more prominent drivers include:

    * Stratospheric resin pricing and continued volatility.

    c Customer consolidation putting even long-term client relationships at risk.

    * The shift by customers to global suppliers, necessitating the need to be able to serve customers nationally and globally.

    * Increasingly demanding customers who are using packaging to sell, rather than to package, leading to the necessity for companies to increase capital expenditures without necessarily benefiting from increased margins.

    * Environmental pressures.

    Thus, consolidators have been battling the continued pressure on margins by seeking synergies from acquisitions such as overhead reduction, volume-purchasing savings, freight-reduction opportunities and opportunities to cross-sell products.

    Despite the difficult economic and financing environment, the key consolidation forces are still very much present, which should result in continued M&A activity. In fact, several transactions have already been announced in 2008, with Berry Plastics Corp. continuing its active role in the consolidation with its acquisition of Captive Plastics Inc., while Clondalkin Group Ltd. has expanded its share in films with its acquisition of Accutech Films Inc. Finally, weakness in the economy coupled with high leverage should lead to an increase in creditor-driven sale processes such as the late-January sale announcement by Atlantis Plastics Inc.

    Louis W. Mitchell is a managing director in investment banking at Mesirow Financial Holdings Inc. of Chicago.

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