Companies in the plastics packaging industry, especially those in the middle market ($50 million to $500 million), are under tremendous pressure of consolidation, and they must identify the situation and create effective strategies.
You can be vulnerable in the global consolidation if you don't have a proper strategy, said Tom Blaige, chairman and CEO of Chicago-based financial firm Blaige & Co. LLC. You can be strong and proud, he said, but without the right plan you could possibly end up being gone.
The impact of M&A activity is reflected by the fact that nearly half of the top 50 players in both flexible and rigid plastics packaging in 2005 either have been eliminated or changed ownership during the past decade.
Those who are below the top 50 are definitely being affected as well, Blaige said at the AWA Mergers & Acquisitions Executive Forum 2010, held June 7-8 in Chicago.
He divided market players into three categories. He tagged the top 20 percent as the leaders and top consolidators. They are rapidly gaining market share and aggressively acquiring and divesting. These firms achieve market domination via the best acquisitions and selective divestures.
The 60 percent in the middle are others, or static participants with slow market share erosion. Their survival strategy is to become stronger through either mergers and selective acquisitions or niche leadership.
Blaige called the bottom 20 percent followers or consolidatees those usually losing share at a fast pace. These firms should be looking for divestures in terms of raising cash and selling at maximum prices. They can still be successful make a two- or three-year plan and maximize the value, he said.
The key, for all companies, is to recognize where they are in the matrix.
Unfortunately, Blaige said, most middle-market companies are in the others category and don't have a clear idea of their position and direction. But that needs to change.
Based on Blaige & Co.'s research on 1,308 packaging transactions during 2002-09, 72 percent were plastics deals, mirroring the level of industry fragmentation and the momentum of consolidation in plastics packaging. That compares with the non-plastics part of the industry, which during the past 30 years has consolidated from 58 competitors down to seven leaders that represent more than 80 percent of market share for glass and metal packaging combined.
Blaige is seeing a similar trend in plastics. But it's going to be 10-15 years before it starts to get to that level, he said.
Plastics packaging deals nearly tripled from 50 in 2002 to 143 in 2009, with an even split between rigid and flexible packaging.
Analysis shows that 72 percent of buyers in 2009 are strategic buyers, 12 percent are financial add-ons, and 16 percent financial platforms recapitalization, in other words.
Seller profiles include 57 percent private sellers, 38 percent corporate divestures, and 5 percent financial sellers which are quick to react to market conditions.
A noteworthy growing trend is that 50 percent of the 2009 deals were outside U.S. borders, 34 percent were between U.S. companies, and 16 percent were between U.S. and international firms. Europe was a net seller; Asia, a net buyer.
For the 2010 thus far, Blaige said, the major trends in M&As show:
* Mega deals increasing the level of competition.
* Critical mass lying on raw material cost savings through increased buying power and supplier relationship.
* Extending geographical coverage and accommodating global customers with global suppliers and production.
* Achieving material and process flexibility and branching into new product formats.
* Obtaining management talent.
* Dealing with tight credit markets.
Packaging converters face a squeezing effect from upstream, downstream and competitive pressure, Blaige pointed out. Specifically, they face customer globalization and consolidation, supplier consolidation, raw material prices volatility, maturing growth and a need for product differentiation. Companies need to identify their situation, adopt an M&A strategy, create a transaction team and execute strategy, he said.
While the plastics packaging sector as a whole is seeing a strong momentum for consolidation, Blaige said that rigid packaging in particular, may benefit down the road with the conversion to plastics from other materials. Flexible packaging was more popular in the past decade, he said.
A comparison of disclosed transaction multiples indicate a mean EBITDA earnings before interest, taxes, depreciation and amortization multiple of 6.5x among 20 flexible packaging transactions and a mean multiple of 6.8x for 20 rigid packaging deals.
Those multiples are reasonable for a quality business, he said. Meantime, the market is showing a fly to quality, Blaige added, with bigger discounts for companies that are perceived as less desirable, bigger premiums for the few companies that are perceived as more desirable.
The AWA M&A event was organized by Amsterdam-based Alexander Watson Associates BV, with North American offices in Washington.
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