After months of tight credit, private equity groups are once again beginning to take serious looks at potential investment targets, including plastics firms.
While it is too early to make any sweeping generalizations, two different private equity firms put funds into plastics molders within days of each other in August, and one of those companies is ready to put money into more acquisitions if the purchase makes sense.
We're opportunistic about that, said Michael McGovern, a partner in Wincove Capital, a New York-based private equity firm that purchased molder GI Plastek Wolfeboro LLC in a deal completed Aug. 20.
Seven days later, Summit Financial Resources LP of Salt Lake City agreed to provide a line of credit for injection molder Perfection Components LLC that will help the Danville, Ky.-based company finance future production.
Neither company disclosed the amount of money involved in the transactions.
Wincove is not looking at a high-volume roll-up acquisition strategy that was popular in the past, but instead will target specific purchases where it makes sense for GI Plastek's long-term strategy, he said.
The GI Plastek purchase is only the second for Wincove, which was founded in 2008 and focuses on lower middle market manufacturers with a sales base of $100 million or less. Action in that market level has been very slow, McGovern said, but his company is starting to see interest pick up by other investment groups.
A month ago, there was still a vacuum [in private equity], agreed Michael Benson, a managing director with financial consulting group Stout Risius Ross Inc. in Southfield, Mich. Now there's interest. They're starting to do research, they're starting to try to make things happen.
While Benson said he would not make any comparisons to lights at the end of the tunnel yet, he is seeing real movement. For instance, his group has been trying to complete a deal for a firm for nearly a year, but everything went on hold for four months at the height of the recession. Now the companies may be nearing completion on an agreement.
Acquisitions were down only 2 percent globally in the plastics industry for the first half of 2009 compared with the same 2008 period, said Tom Blaige, CEO of Blaige & Co., a Chicago financial consulting group. But the vast majority of those acquisitions from this year 83 percent were from strategic add-ons, such as existing financial or manufacturing groups picking up one or two distressed sites to fill out a portfolio.
Pure private equity acquisitions made up 17 percent of the action, compared with as much as a third in past years, he said.
Now private equity groups are making a lot of noise, he said.
Part of the rise in interest is because equity firms have dealt with internal problems at their existing investments, Benson said. With fewer fires to put out at home, they can begin looking for other opportunities.
In addition, the difference between now and just a few weeks ago is that financial investors are in a better position to look at new deals than they were when they had issues with businesses already in their portfolio. And at the same time, some economic signs are pointing toward the economy being near the bottom which makes it the right time to invest.
Robert Fry Jr., economist for Wilmington, Del.-based DuPont Co., said in a Sept. 3 report that the recession is over in most of the world. He warned that recovery likely will be weak, but said there are few signs now of a feared double- dip recession.
That means that companies in a position to invest should be able to make good deals now and have fewer competitors.
GI Plastek drew Wincove's attention because it has a strong management team and workforce, makes parts for a variety of end markets and has processes including high-pressure structural foam molding and gas counter- pressure injection molding. That means the company has fewer competitors.
They bring different tools to the table and just needed some additional capital to grow, McGovern said. This fits pretty squarely into our area. They're clearly in a depressed market right now, but we do think the time is right and that they'll be well-capitalized for growth.
Perfection Components, meanwhile, is a prime supplier to Japanese automaker Toyota Motor Corp. which puts it on stronger footing since Toyota has a mix of products that still sell well to the North American consumer.
Perfection, which worked with Chicago-based financial group Houlihan Smith & Co. Inc. to arrange its financial profile for investors and seek out companies, will be able to use the credit to reassure customers that it's ready to take on new work and buy new equipment it may need for projects, said President Adrian Gerardo.
While banks are still hesitant about loaning money, Gerardo said the full review conducted by Houlihan Smith established a solid financial base for the company. That will mean a lot in an industry that is likely going to be slower to recover, when many of Perfection Components' competitors are still struggling.
The first question [customers] want to know is whether you are financially sound, Gerardo said.
Perfection Components' sales to Toyota make a difference. Automotive in general, especially suppliers to U.S.-based automakers, are not seeing the same inklings of interest as are molders producing for a mix of industries, Benson said.
The U.S. auto industry will likely see its lowest sales rate this year since 1961, said DuPont's Fry.
There is going to be an uptick in activity, Benson said, but it's going to be for specific plays.
But molders that want to sell now should beware, Blaige warned. Some deals are looking to play on the low activity of the past months and convince owners to act quickly, while they can. Some of the deals being offered by private equity firms will not benefit the molder in the long run.
They're marketing like crazy and trying to make business owners make a deal very quickly, which may not be the best deal for them, Blaige said.
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