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February 18, 2008 01:00 AM

More merger mania unlikely for '08

Dan Hockensmith
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    Plastics processors will see fewer mergers and acquisitions in 2008, but the market will remain relatively strong, several industry experts say.

    A lot hinges on whether the U.S. economy is acknowledged to be in recession.

    ``Everybody's taking a wait-and-see attitude. There's still a lot of an uncertainty as to what's going on,'' said Howard Snyder, vice president of the plastics and packaging group at Curtis Financial Group LLC in Philadelphia, in a Jan. 22 telephone interview.

    Uncertainty is one of the first words off the lips of investment banking executives to describe the 2008 M&A outlook in plastics.

    The year began with a continuation of the 2007 credit crunch and slow housing market, fears of a looming U.S. recession and increased globalization in which the weakened U.S. dollar could be used by foreign buyers to their M&A advantage.

    The plastics M&A market appears destined to remain divided, as in 2007, into clearly defined strategic deals and middle-market activity driven by private equity.

    And it's all happening on the heels of a year that saw record overall M&A transactions - $45 trillion in global deals, with $1.5 trillion of that happening in the United States, according to Dealogic (Holdings) plc, a London-based company that tracks acquisitions.

    Data from Curtis Research Group International LLC of Berkeley, Calif., shows plastics M&As in North America declined 6.3 percent through the first nine months of 2007 - 75 deals compared with 80 during the same period in 2006 - as private equity firms scaled back their add-ons.

    Snyder said the recent $1.1 billion deal for Myers Industries Inc. of Akron, Ohio - which buyer GS Capital Partners VI has postponed until at least April 30 - is typical of the ``sexy'' M&A deals he believes will slow down in 2008.

    ``So [Myers] does two acquisitions in the first three months of [2007], then they turn around and are ready to be acquired. Then the market falls out from under them and we're in a holding pattern,'' Snyder said. ``The days of throwing a prospectus together, getting out to market quickly and talking about 15 percent generic growth is not being accepted as a viable growth strategy.''

    That said, Snyder and other executives are advising clients that plastics - especially packaging - remains a solid investment.

    Three of the largest M&A deals of 2007 were in packaging: Rank Group Ltd.'s pending purchase of Alcoa Inc. for $2.7 billion; Rexam plc's $1.8 billion purchase in August of OI Plastic Products; and Blackstone Group's June acquisition of Kl”ckner Pentaplast GmbH & Co. for $1.75 billion.

    Financing, multiples

    Several sources indicate megabuyouts will have difficulty securing financing in 2008, but middle-market M&As driven by private equity will remain steady.

    ``There's still going to be M&As. It may not be at the volume of 2005 and '06 - those were phenomenal years, frankly - but there's still going to be an amount of that going on,'' said Louis Mitchell, managing director of investment banking at Mesirow Financial Holdings Inc. in Chicago.

    According to Mesirow research, plastic packaging M&A multiples decreased from an average 8.8 times earnings before interest, taxes, debt and amortization in 2006 to 7.9 times EBITDA in 2007.

    ``Transactions are getting done at 6.5 times EBITDA,'' Mitchell said. He and other sources said the middle market remains a viable area for private equity-driven M&As.

    ``We would maintain the 5-7 [times EBITDA] range is generally where most of the transactions in the sector trade,'' said Doug Lawson, a Chicago-based managing director in the BMO Capital Markets Commercial & Industrial Group.

    BMO's report on M&As shows EBITDA margins for the overall plastics industry declined about 2.1 percent since 2002.

    The subprime mortgage lending crisis has caused lenders to be more cautious in leveraged transactions such as M&As, Bill Ridenour, president of New- bury, Ohio-based Polymer Transactions Advisors Inc., said via e-mail.

    ``On a middle-market M&A that would previously have been bought at a 5-7 times EBITDA value, 1.5 times EBITDA is a substantial financing gap for a private equity group to make up. As a result, we see private equity groups as less effective in buying companies for 2008,'' Ridenour said.

    Strategic buyers

    Will Frame, managing director in Chicago for the paper, plastics and packaging unit of Deloitte & Touche Corporate Finance LLC of Detroit, said he remains ``bullish'' about M&As.

    ``There will be more strategic acquirers mixed in with private equity groups, as opposed to the past, where private equity was driving,'' he said.

    An example of that, he said, is Spartech Corp.'s September acquisition of Creative Forming Inc. for $61 million, which is being financed through Spartech's bank credit facility and operating cash flows.

    Several analysts mentioned Berry Plastics Corp.'s 2007 buying spree.

    The Evansville, Ind.-based company in March merged with Covalence Specialty Materials Holding Corp., then in April acquired Rollpak Corp., and in December purchased Captive Plastics Inc. and Mac Closures Inc.

    ``Good companies are always going to be valued by strategic players,'' Mitchell said.

    In a Feb. 8 news release, Tom Blaige, chief executive officer of Chicago-based Blaige & Co. LLC, said strategic buyers made up 67 percent of plastics M&As in 2007, compared with 85 percent in 2002. He noted that in 2007, private equity investors or portfolio companies made up 20 percent of the top 10 and top 60 acquirers.

    Foreign buyers

    There's considerable variance of opinion among bankers whether European or Asian buyers seeking to acquire U.S. plastics companies will do many cross-border deals this year.

    Blaige noted that plastics transactions involving international players increased from 50 percent to 68 percent from 2002-07, and from 61 percent to 68 percent from 2006-07.

    Those who believe European buyers will continue to dominate cross-border M&As point out that the U.S. dollar has been worth about 70 cents per euro since late 2007. The two currencies haven't been equal since late 2002.

    According to Ridenour, his company is advising clients to include and emphasize European buyers in the selling process.

    ``In our experience, the European buyer has also been more receptive to doing a stock purchase than a U.S. buyer - which has favorable ramifications to a business seller as well,'' Ridenour said.

    Hector Cuellar, president of financial services company RSM EquiCo Inc. of Costa Mesa, Calif., said, ``We are doing a lot of transactions both in Asia and in Europe.''

    He said he thinks interest rate cuts announced by the Federal Reserve in January will aid M&As. ``You'll see potentially cheaper debt, which will allow acquisitions to continue,'' he said.

    Matt Jamison, a director with P&M Corporate Finance LLC in Southfield, Mich., said Chinese and Indian buyers also will be active in U.S. M&As.

    Although their labor costs give them a competitive advantage over American and European processors, he said, Asian buyers want access to U.S. markets and distribution networks, particularly in packaging and medical end markets.

    Neither of those segments lends itself well to offshore production because of shipping and government regulations, he said.

    ``You have companies that see opportunities here in the states because of those markets. They can gain new customers and gain market share because of the favorable exchange rates,'' Jamison said.

    But several sources said foreign buyers are taking the same wait-and-see attitude as their counterparts in the United States.

    ``The data we ran does not show [acquisitions of U.S. producers] happening,'' said BMO's Lawson.

    ``Globally, the packaging markets are fragmented. The strategic acquirers have a lot of opportunity within their own markets,'' he added.

    Deloitte & Touche's Frame said foreign buyers are taking their time before committing to deals.

    ``Asian and European groups we're talking to are careful and they're selective. They're looking for access to markets [and] accelerated technology,'' Frame said.

    Positive markets

    Plastics end-markets that will stay strong in 2008 include medical, defense, aerospace, packaging, automotive and consumer goods, several experts agreed.

    One example of the kind of merger that will continue in 2008, several sources said, is the all-cash acquisition of Arrow International Inc. in Reading, Pa., in July by Limerick, Pa.-based Teleflex Inc. for $2 billion.

    Teleflex Medical, which makes disposable products for the anesthesia, respiratory, urology and surgical markets, derives half of its sales from outside the United States. Arrow, a leader in cardiac-care products such as pumps and catheters, gets 42 percent of its $500 million in annual sales from outside the United States.

    Selling smart

    The Labor Department on Feb. 1 reported the U.S. economy lost 17,000 jobs in January, the first monthly decline since August 2003, further deepening fears of an impending recession.

    Effects of the $168 billion economic stimulus package Congress approved Feb. 8 will take several months to be felt.

    The possibility that Democrats soon could control the White House and Congress has several investment sources speculating capital gains taxes could increase in 2010, when the current top-end rate of 15 percent lapses.

    ``To get in under the tax `window,' we are seeing potential sellers increasingly point to the likely increase in the long-term gains rate as a major factor influencing their decision to sell,'' Ridenour said.

    Meanwhile, several sources said, companies that express solid value to potential buyers will be the ones that get bought.

    ``Quality companies that invest the time to create and clearly communicate a compelling story of value creation will significantly enhance the probability of success and realizing a premium valuation,'' said Curtis Financial's Snyder.

    His advice to business owners looking to sell: keep it simple.

    ``Be overprepared and able to show a buyer exactly how your company will grow and perform,'' said Snyder. ``Do not assume that it's obvious and that a buyer will get it on their own.''

    Frame said most processors will be able to stay above economic fears by doing what they've always done. ``Most companies who are standing and still successful are used to weathering many storms and are used to weathering a weak climate.''

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