Financial uncertainty has triggered a slowdown in global mergers and acquisitions, but the plastics sector still shows signs of life. A surprising number of plastics processor deals are happening and more will be announced before year's end, industry watchers said.
According to financial adviser Tom Blaige, there have been about 250 global plastics M&A deals so far in 2008. Deal volumes are up among firms involved in film and sheet manufacturing; pipe, profiles and tubing extrusion; thermoforming; machinery and tooling; as well as in plastics packaging and medical device manufacturing, said Blaige, owner of Chicago-based investment banking firm Blaige & Co. LLC.
``I think this happened last in 1999-2000, when resin prices last spiked,'' he said in a July 8 telephone interview. ``Ten or 15 years ago, a lot of companies were buying just to get bigger. It seems what has happened — especially with globalization and even with a weak U.S. dollar — [buyers] are much more specific now about what they're buying and it has to fit into their overall strategies.''
M&A volume in injection molding is expected to be in its second year of decline, Blaige said. But sectors holding steady include raw materials and compounding, blow molding, foam and rotational molding.
Bill Ridenour, president of Polymer TransAction Advisors Inc., put the number of North American plastics deals so far this year at 74 — as of June 30. That represents a whopping 46 percent increase over midyear 2007, he said. North American strategic buyers made 47 of those deals, or 64 percent of the total, he said.
``Strategic buyer pricing remained steady and strong as many buyers used existing credit lines and cash to finance their acquisitions and were not limited by bank financing,'' Ridenour said in a July 3 e-mail.
He cited several reasons that strategic and private equity buyers are carefully considering their next moves: rising feedstock and resin prices, the U.S. credit crunch and heightened fears that the next Congress will raise capital-gains tax rates, which have been capped at 15 percent since 2003.
Outside the plastics industry, those factors are all helping to put a damper on M&A activity. Dealogic (Holdings) plc, a London firm that tracks acquisitions, claims global M&A volume fell 31 percent in the first half of this year, with Europe registering the steepest decline.
Deals in the U.S. fell 30 percent, to $694.3 billion, while activity in Asia Pacific rose 5 percent to $390.7 billion. Deals involving Chinese targets rose 94 percent, to $115.46 billion, according to Dealogic.
Rod MacDonald, with KeyBanc Capital Markets in Cleveland, agreed with Ridenour, especially in regard to strategic buyers.
``I think they're being very judicious in their due diligence,'' said MacDonald, a managing director in the KeyBanc industrial group. ``They've certainly got an eye toward raw materials and what that's going to mean toward their cost base. And they're also taking a very strong look at the end markets and the susceptibility or the vulnerability that those end markets have from a raw materials standpoint.''
Strategic M&A activity in the first half of 2008 included:
* Kongsberg Automotive Holding ASA, of Kongsberg, Norway, completing in March its $650 million purchase of Teleflex Inc.'s global motion systems division, including several North American automotive plastics plants.
* Cleveland-based Parker Hannifin Corp.'s April acquisition of the six specialty medical businesses of HTR Holding Corp.
* Glendale, Wis.-based Johnson Controls Inc.'s July takeover of bankrupt Plastech Engineered Products Inc.'s auto interiors operation. JCI contributed $135 million in cash and folded its five injection molding plants into the venture.
But several announced M&A deals fell through, including:
* Spanish PET supplier La Seda de Barcelona SA's backing out of a deal announced in January to buy Intercontinental Química SA for about $873 million.
* GS Capital Partners' April withdrawal of its $1 billion offer for Myers Industries Inc.
* Middlebury, Conn.-based additives giant Chemtura Corp.'s announcement in June that it would remain one company, rather than selling or spinning off its business units.
* Columbus-based Hexion Specialty Chemicals Inc.'s lawsuit, filed in June, that seeks to pull out of a $10.6 billion offer for Huntsman Corp. that Hexion made in 2007.
Ridenour — who characterized first- and second-quarter 2008 M&A pricing as ``manic'' — said private equity multiples on earnings before interest, taxes debt and amortization in lower midmarket deals were down by one to four times EBITDA. Automotive molders, in particular, have been selling at low multiples — four times EBITDA or lower.
``Clearly the multiples are going down, which is what the [strategic buyers] wanted,'' said Liley Mehta, director of Standard & Poor's corporate and government ratings. ``A lot of the large packaging players who typically play a consolidator role are much disciplined. They won't pay more than what they think a business is worth. So they just stayed out of all this.
``Now the private equity guys are pretty much out of the picture, given how tight credit markets are. There's no appetite for something that's leveraged very highly, which would have been easy to place and close on a transaction last year or two years ago,'' Mehta said.
Packaging was at the heart of one of the largest announced plastics deals of the year so far, when Hicks Acquisition Co. Inc., a Dallas-based special-purpose acquisition company, made its first buy — plastic bottle maker Graham Packaging Holdings Co. The $3.2 billion deal with Blackstone Group of New York and Graham Group will result in York, Pa.-based Graham going public this year.
David Evatz, a director in Stout Risius Ross Advisors LLC's investment banking group, said specialty thermoformers are particularly attractive M&A prospects.
``We're seeing a lot of interest in medical [applications] right now in anything that's injection molded or some types of packaging or tubing — that's a very active market right now,'' Evatz said.
Evatz said precision injection molders serving the medical and electronics markets will be targeted for acquisition. He cited Blair Capital Partners' April acquisition of ATP Engineered Rubber & Plastics Group and K&W Medical Specialties to form MedPlast Inc. as an example of private equity managers using capital where financing risk was limited.
``It really comes down to that calibration happening, where the expectations need to come down to meet the ability for these groups to pay, then you'll see more transactions,'' he said.
Blaige & Co. data show medical deals expanded significantly in recent years, from eight deals in 2005 to a projected 58 for 2008.
Automotive and building materials M&A volume is likely to remain slow for the year, according to analysts.
``When you talk to clients who are exposed in auto [and] who are exposed in areas of construction, those industries are way, way down,'' MacDonald said.
``They're not only getting hit in terms of raw materials cost but, they're getting hit by volume. That's a two-edged sword, especially as the volumes go down and their overhead absorption in their plants goes down — it's a difficult circumstance.''