With a little luck, the plastics mergers and acquisitions market might weather the recession in better shape than other sectors.
Global plastics M&A deal volume fell 8 percent in 2008 vs. 2007, but that performance was “more resilient” than other M&A markets, according to Matt Jamison, managing director at P&M Corporate Finance LLC in Southfield, Mich.
And although 2009 is off to a slow start, with volume down almost 30 percent in the first 45 days of the year, Jamison said “deals are still getting done” in 2009.
“There's activity in medical, aerospace and packaging,” he said. “But there also are a lot more distressed deals, so pricing will be down.”
Jamison spoke while moderating a panel that featured four other plastics M&A veterans at the 2009 Plastics News Executive Forum, held March 1-4 in this Las Vegas suburb.
The panel included Jack Knott, chairman, president and chief executive officer of flexible packaging maker Exopack Holding Corp. in Spartanburg, S.C. Knott, who works out of Chicago, said that he sees plastics M&A coming back in 2009 after a difficult 2008.
“Initially there will be carve-ups and also distressed property sales,” said Knott, whose firm has annual film-related sales of $350 million. “Some companies came into the current cycle over-leveraged or not with the right management team.”
Creativity also will be a must in order to get plastics M&A deals done in 2009, according to Joe Klunk, president and chief executive officer of diversified custom processor Parkway Products Inc. in Florence, Ky. Parkway made five acquisitions between 1991 and 2004, most recently buying a specialty business from Solvay Advanced Polymers LLC.
Unconventional options for M&A players in 2009 include buying a book of business — essentially customer accounts and sales and production information — from targeted firms. Purchase prices for books of business can be based on one year's gross margins, Klunk said. Potential buyers also may want to look at selling minority stakes to other investors, while giving those investors super-rights to minimize their risk.
Wind Point Partners — a Chicago-based private equity firm — plans to be active this year, but recently there's been “a lot of difference between showing interest and getting deals closed,” said Paul Peterson, a principal with the firm.
“You need to approach each buyer very carefully,” said Peterson, whose firm has acquired three North American compounders since early 2007. “It's a mistake to go to a broad group. It's better to get into one-on-one, select, confidential situations as soon as possible.”
Financial uncertainty also means that 2009 will be “another interesting year in M&A markets,” said Jeff Kolke, senior vice president with GE Commercial Finance in Chicago.
“The trend is on the negative side, with [valuation] multiples down,” Kolke said. “But the loose standards and loose underwriting of 2005-07 has certainly changed. How do you put a multiple on lending on an earnings stream when you don't know what the earnings stream is?”
Kolke added that he also expects to see more sales such as that of Atlantis Plastics Inc. in 2009. That Atlanta-based firm sold its film unit and injection molding business to separate buyers in August 2008. Those businesses had annual sales of more than $400 million but ended up being acquired for a total of about $115 million.
“We don't want companies to go bankrupt, and will provide liquidity where we can,” Kolke said. “Three years ago, everyone was throwing money around. Now they're seeking maximum return while minimizing risk.”
Exopack's Knott added he expects 2009 to bring more consolidation in the North American flexible packaging field, which still numbers more than 400 companies.
“I think the [flexible packaging] market will consolidate through M&A just to offset the margin leakage we've been living with for many years,” said Knott, whose firm made three acquisitions in 90 days in 2005 and closed two other deals in 2007. “You're not going to stop evolutionary consolidation.”
Strategic buyers from within the industry are likely to be more active than financial ones in 2009 because they don't rely on as much leverage, according to Klunk at Parkway. GE's Kolke advised that in 2009 distressed companies “can be good opportunities if it's a core competency fit for you, and it might not have been for the other company.”
Wind Point's Peterson expects his company to be able to continue its acquisition strategy in compounding in 2009, even though finding financing has become more challenging. Being a strategic buyer by virtue of already owning three compounders should help Wind Point in the M&A world, he said.
“There are still more than 100 compounders in North America alone,” Peterson added. “Many smaller companies are being forced to compete on a global basis, and there's not a lot of private equity aggressively seeking out acquisitions.”