Amid worsening economic jitters, a panel of industry experts has predicted mergers and acquisitions among North American plastics processors will slow down in 2008.
But that's not cause for undue concern globally, because the vast majority of M&A activities occur outside of this continent, the panelists said.
``Unlike the good old days, when the United States and North America were really leading-edge in acquisitions in any industry ... because of the globalization of the industry, a lot of capital is chasing deals all over the world and the United States is but one of several M&A markets,'' said Bill Ridenour, president of Polymer Transaction Advisors Inc. of Newbury, Ohio.
Ridenour was joined by several experts for an M&A discussion at Plastics News' Executive Forum, held March 10-12 in Tampa. The panel included Ira Boots, chief executive officer and president of Berry Plastics Group Inc. of Evansville, Ind.; Duane Jebbett, president and CEO of Findlay, Ohio-based Rowmark LLC; and Greg Myers, managing director of buyout funds at Milwaukee-based private equity group Mason Wells.
Panelists agreed a U.S. economic recession, the possibility of terrorist attacks on oil pipelines and the continued woes of the Big Three automakers in Detroit - which could make some plastics suppliers weak M&A candidates - are key concerns for buyers and sellers this year.
``Automotive isn't the best segment to negotiate from, but if you're in one of the other niche markets out there, you're going to do fine,'' Rowmark's Jebbett said.
Ridenour said there were 390 global plastics M&A deals in 2007, compared with 410 in 2006 and 408 in 2005. Among 2007 transactions, 91 (21 percent) involved North American companies, while 299 (79 percent) were overseas deals, he said.
Ridenour's firm predicts about 360 M&A transactions this year, with prices staying flat. He said companies with sales of $5 million to $10 million will obtain pricing multiples of three to five times earnings before interest, taxes, debt and amortization. Midmarket companies, of between $10 million to $100 million, will have multiples of five to 7½ times EBITDA, he said, and companies with more than $100 million in sales will attract multiples of 6½ to 9½ times EBITDA.
``We're seeing international buyers and strategic buyers getting back into the market more than we have in the past several years,'' Ridenour said. He noted the presence of a 29-person Indian delegation at the forum as proof of cross-border interest in North American plastics markets coming from Asia. Ridenour said 25 percent of M&A transactions in 2008 will be by international buyers, with 30 percent coming from private equity groups. He said 45 percent of deals will involve strategic buyers.
For the U.S., Ridenour predicted strong M&A activity across nearly all plastics sectors in terms of consolidation, strategic buyers and private equity buys. He said there will be a decline in value-add deals in injection molding, pipe and profile extrusion, thermoforming, and processing equipment; as well as a drop in private equity groups doing M&As in blow molding, and international buyers making deals in the pipe, profiles and tubing sector.
Following Ridenour's presentation, panelists shared their companies' varying strategies for M&As in 2008.
Boots said despite the U.S. credit crunch that has caused private equity to back off M&As a bit from recent years, banks still are lending money.
``The banking communities are still very supportive on bills that are disciplined and have the right characteristics underneath,'' Boots said. ``But the difference today from where it was a year ago, in particular, is that you're going to put more equity in yourself and partners are going to have to invest more. ... [Banks] want a little more piece of the action in play and, second of all, [they] are going to ask you to meet higher [financing] covenant rates.''
Having a clear M&A strategy is crucial for strategic buyers in the current business environment, he said. Boots said his $3.5 billion company has done 26 M&A deals in the past 15 years as part of a carefully scripted 100-year strategic plan drawn up in 1990, when Berry had $4 million in sales. ``We're a platform-based company,'' he said. ``We're looking for bolt-ons.''
By contrast, Jebbett said Rowmark - which makes custom sheet and roll stock for the signage, point-of-purchase and thermoforming markets - is looking for niche markets to grow into. He said fears about the U.S. economy will drive small companies to make M&A deals the same way families make decisions about their finances.
``I think smaller companies are going to have to look at the family and say, `Are we meeting the real needs of the family long-term vs. short-term?''' Jebbett said. ``Bank financing clearly is an issue, especially for the smaller deals, because the banks aren't willing to take the risk on the smaller companies.''
Myers said private equity remains a key player in plastics M&As. His firm expects its activity to stay about the same as in 2007.
``We're way bullish on the industry,'' he said. ``I think the pricing will trend down over time and I think that will make for better buying opportunities.''
Myers said private equity is attracted to companies that have control over design and engineering services, as well as lower material content. ``We look and gravitate toward businesses that have the higher value-added product system, as opposed to commodity products,'' he said.
All panelists said that, in addition to pricing, companies wishing to be bought need to be aware of other factors buyers look for in M&A: management, leadership, innovation and solid customer bases.
Boots offered this formula for platform companies to stay afloat in an uncertain U.S. economy: ``Try to get your top 10 customers to be 50 percent of your business.''
Myers said 2008 buyers will scrutinize M&A candidates from the top down: ``In the real estate market it's location, location, location. In the private equity [M&A] game, it's management, management, management.''