Owners of U.S.-based plastics businesses work hard for their money. And a desire to hold on to more of that hard-earned cash might lead some older entrepreneurs to sell their businesses before 2010 is over.
That's because a 15 percent U.S. capital gains tax rate becomes 20 percent on Jan. 1, 2011, as tax cuts put in place by the Bush administration expire. There's some concern that rate could increase to 25 percent by the end of 2012 as the U.S. government looks to increase revenue amidst an ever-expanding budget deficit.
“There will be a lot of Dec. 31 closings this year,” said Bill Ridenour, president of the Polymer Transaction Advisors Inc. consulting firm in Newbury, Ohio. “People are hoping to settle their estate and prepare for that long retirement they've been hoping for.”
Both Ridenour and Terry Mackin, managing director at financial firm Generational Equity in Dallas, said they've got a number of clients who want to sell by the end of the year because of the pending capital gains change.
The capital gains tax rate “is going to go to 20 percent right away, and we've heard it could go as high as 25-32 percent,” said Mackin, whose firm participated in the sale of injection molder Accu-Tech Products Inc. to industry veteran William Maclean in 2008.
“That's a big jump. I think it's more likely that the Obama administration would try to raise it to 25 over the next two years.”
Will Frame, managing director of the Chicago office of Deloitte Corporate Finance LLC, agreed that “a bigger chunk” of plastics businesses might be available in the second half of 2010 because of the pending tax changes.
“In general, we expect to see a lot of plastics M&A announcements in the second half of 2010,” said Michael Del Pero, a vice president with FocalPoint Partners LLC in Los Angeles. “A lot of deals that have been on hold for the last 18 months are going to come back to the market, and some of that's because of these tax changes.”
The capital gains change is creating “a good window to exit,” according to Frank McGrew, managing director at Morgan Keegan & Co. Inc. in Memphis, Tenn. The change even could drive sellers to accept lower earnings multiples when determining the sale price of their businesses, he added.
“A lower multiple might not look so bad after taxes,” McGrew explained. “This is clearly motivating some deals to get done by the end of the year.”
But not every financial adviser is convinced that capital gains-related deals will have much of an impact. At P&M Corporate Finance LLC in Southfield, Mich., John Hart said that capital gains “is a driver, but it's not the only driver.”
“You have to consider a lot of factors,” said Hart, who is director of the firm's plastics and packaging group. “It's not going to drive a significant amount of activity, but it will drive some.”
At Blaige & Co. of Chicago, President Tom Blaige was even less convinced.
“There's been a lot of hype about capital gains,” he said. “A lot of brokers are trying to push people to sell. But when you're deciding to sell, the fundamentals of your business should be more important than a 5 percent increase on taxes.
“If your earnings are down this year, you'd be crazy to sell just because there's going to be this change in capital gains. Some people have contacted us and asked about it, but we've told them it shouldn't be the deciding factor in whether you're going to sell or not.”
Blaige adviser Ed Parkinson added that “it's superfluous to change your business strategy based solely on a 5 percent tax consequence.”
“Don't make a tactical decision which is contrary to your strategic objectives,” he said.
Half here, half there
Overall plastics M&A activity increased slightly in the first half of 2010 vs. the same period in 2009, according to data supplied by P&M and by Blaige & Co. P&M totals showed an increase of almost 6 percent in the number of global plastics and packaging deals, while totals from Blaige showed a more modest increase of less than 2 percent.
But financial advisers throughout the industry said that distressed deals from '09 were replaced by quality deals in 2010. This was demonstrated in P&M's data, which showed that distressed deals made up only 7 percent of first-half deals in 2010 — down from 22 percent in the same period in 2009.
“Strategic investors weren't very aggressive six months ago, but they saved capital and kept their powder dry,” said Michael Benson, managing director with Chicago financial firm Stout Risius Ross Inc. “Private equity wasn't very aggressive either. But now they hope the worst has passed. Strategic investors are coming back pretty strong.”
Private equity buyers also could play a larger role in the second half, with some estimates placing the amount of unspent private equity funds available at almost $300 billion.
“There's been quite a dramatic change,” said Frame at Deloitte. “Plastics in general, and packaging in particular, are viewed as a very resilient sector. They're much less subject to dramatic changes, and that's a very attractive message to private equity.”
Blaige, Mackin and Stewart Kohl, co-CEO at private equity firm Riverside Co. of Cleveland, each echoed Frame's optimism.
“There's been improvement in quality and quantity every month this year,” said Kohl. “It's becoming a real avalanche.”
Blaige added that the 2010 market “is roaring back right now... it's active and aggressive.” Mackin pointed out that “all the indicators are there for more quality deals.”
Strategic buyers won't be left out either. They're benefiting from 2009 cost-cutting initiatives and improved demand, according to Hart at P&M, and are leveraging strong cash positions and balance sheets to acquire share and capabilities.
Some noteworthy trends emerge from P&M's first-half data. Increased interest in plastics packaging led to the number of food and beverage deals increasing from 19 to 24 vs. the first half of '09. Blow molding deals doubled from seven to 14 for the same reason, Hart said.
A reduction in distressed deals led the number of transactions in industrial end markets to drop from 56 to 48, and the number of transactions in industrial products to slip from 31 to 17. In spite of these decreases, the companies involved in those deals actually were healthier than the year before, according to Hart.
Deals involving custom injection molded products jumped from 22 to 35, largely due to a near-doubling in medical deals and an increase in consumer end-market deals as well, he said.
Data compiled by Blaige's firm predicts that full-year injection molding deals will increase from 95 in 2009 to 112 this year, thanks to more deals in injection molded packaging. The number of film and sheet deals is expected to drop from 88 to 68, as non-core dispersals and divestitures that happened in '09 won't be repeated in 2010.
Packaging accounted for one-third of all plastics M&A deals in the first half of 2010, just as it had in the first half of 2009, according to P&M. But the number of deals involving private equity firms dipped from 36 percent to 28 percent as distressed opportunities thinned. Blaige anticipates that the number of deals involving financial or private equity buyers will amount to only 19 percent in 2010.
Not all sunshine
But not everyone in the M&A sector believes that the second half of 2010 will be filled with rainbows. Take, for example, Nick Merkel, president and principal of the Merkel & Associates financial firm in Cleveland.
“The biggest impediment to deal-making is a lack of adequate profit on the part of sellers,” said Merkel, whose firm also works with International Merger & Acquisition Partners , an M&A advisory organization in Sarasota, Fla.
“There's been a gradual increase in good companies coming to market in the last couple of years, but it's not going to be quick.”
And while the number of distressed companies is down from 2009, the ranks of the walking wounded aren't completely depleted.
“There are a lot of shipwrecks still floating out there,” said Benson at SRR. “Banks didn't want to force sales because the results to the banks would have been very low. In some cases, real estate values were close to zero. So companies held on, even if they were only paying interest.
“Now a lot of these zombie companies are doing better,” Benson said. “Their performance has improved, so hopefully they'll find buyers.”
Merkel agreed that in 2009 “liquidity values were so low that banks tolerated a lot.”
Ridneour at PTA also is concerned about the possibility of a double-dip recession in late 2010 or 2011. He gives such an event at least a 50 percent chance of happening. The possibility of a double-dip recession also might drive sellers into the market by the end of the year, Ridenour said.
Private money demand
Private equity firms are chomping at the bit at the midyear mark of 2010. Investors have given them money and now want to see them do something with it.
One big private equity plastics deal just closed: Bain Capital LLC's $1.6 billion purchase of Styron, the styrenics and rubber business of Dow Chemical Co.
“The switch has flipped with private equity,” said Frame. “They've gone from worrying about making bad investments to realizing they've raised money to invest, but haven't done it. And now there's greater demand for quality businesses than there is supply.”
SRR's Benson anticipates that private equity “will play more of a role” in the second half. His own firm took part in what he described as “a quasi-private equity deal” in the first half when Patmian LLC bought injection molder Dickten Masch Plastics LLC of Nashotah, Wis. New York-based Patmian is a private firm founded by industry veteran George Votis.
Consolidation opportunities in plastics markets also are appealing to private equity, according to McGrew at Morgan Keegan, a firm that was involved with two major plastics pipe deals in recent years: the sale of PW Eagle Inc. to JM Manufacturing and the sale of the pipe business of Lamson & Sessions Inc. to Thomas & Betts Corp. Both of those deals took place in 2007.
“Private equity companies are investing [in plastics] with an eye on consolidating,” McGrew said. “They believe there's too much capacity.”
At the same time, some private equity companies might be looking to sell some of their plastic assets in the second half.
“A lot of private equity companies have a plus-or-minus seven-year life on their money,” Benson said. “That's the average life of a fund. Then they have to liquidate and generate return to their investors.”
Private equity firms were active buyers in 2005-08, according to Riverside's Kohl, but now may be wanting to sell.
“They need to sell to show a profit and invest in new ones,” he said.
Deal me in
Many eyes in the industry have been focused on the possible sale of publicly held Pactiv Corp., the packaging giant with almost $3.4 billion in annual sales, including nearly $2 billion from thermoforming.
Plastics News and other media outlets have reported that private equity giant Apollo Global Management and packaging powerhouses Georgia-Pacific Corp. and Rank Group Ltd. each are interested in buying Lake Forest, Ill.-based Pactiv. But any such deal would be complicated by the $1.5 billion in debt that sits on Pactiv's books, due in large part to recent acquisitions.
The speculation has driven up Pactiv's per-share stock price from about $24 when the outside interest first was reported in mid-May to recent prices ranging between $28 and $30. Packaging market analyst Ghansham Panjabi previously told PN that Apollo may want to combine Pactiv with Berry Plastics Corp. — the packaging behemoth it already controls — to create a dominant force in the plastics sector.
Pactiv's buying spree was alive earlier this year when it agreed to pay $200 million for PWP Industries, a maker of amorphous PET food-service packaging in Vernon, Calif.
“Pactiv is a big consolidator and they're going to continue to be active,” said Blaige.
There were some rumblings that Pactiv may have paid a steep price for PWP, especially given the uncertainty surrounding the U.S. economic recovery. But Del Pero at FocalPoint said that he thought Pactiv's acquisition strategy made sense.
“I'm not ready to say [Pactiv] overpaid,” he said. “I don't think buyers are in position to overpay right now.”
Ball Corp.'s recent decision to sell its plastics packaging unit to Australian packaging giant Amcor Ltd. for $280 million also garnered much notice within the industry. That deal will make Amcor North America's largest blow molder and effectively remove Ball from the plastics sector.
P&M's Hart cited the $915 million sales of plastic and metal container maker Bway Holding Co. to Madison Dearborn Partners LLC as the type of large, private equity-backed transaction that the industry will see more of. Madison Dearborn plans to take publicly held Bway private.
Blaige singled out S. Walter Packaging Corp.'s sale of its Speci-Gard medical unit to Inteplast Group Ltd. — a deal that Blaige's firm worked on — as “an excellent strategic fit and entree to move upstream to higher-value-added products. No purchase price was disclosed in that deal. Speci-Gard makes specimen bags and other types of leakproof packaging.
And plastic pipe leader Advanced Drainage Systems Inc. made first-half headlines by acquiring a pair of non-plastics companies — concrete pipe makers Foltz Concrete Pipe Co. LLC and Piedmont Concrete. No purchase price was disclosed in either deal.
“ADS does not stand for Advanced Plastics Systems,” Chairman and CEO Joe Chlapaty told Plastics News after the firm's first concrete deal. “It stands for Advanced Drainage. There is no change of philosophy, just a broadening.”
Bank shots
Most financial pros interviewed for this story agreed that bank financing was easier to access in the first half of 2010, and that trend should continue in the second half of the year.
Banks, however, are asking for buyers to put a little more skin in the game, as the saying goes.
“Restrictions on credit have subsided somewhat,” said Blaige. “But you need to throw a larger equity check into deal to get it done. You're probably not going to be able to get bank financing without 40-50 percent equity.”
“Lending is loosening up,” added Frame at Deloitte. “Banks are looking for reasons to say yes instead of no.”
At Generational Equity, Mackin said that higher equity requirements could keep multiples down. P&M's Hart added that improved access to credit markets “has allowed financial buyers to create favorable transaction structures and deploy previously idle capital.”
Multiplication
So if there might (or might not) be more companies coming to market, either because of better performance, aging baby boomer owners or a desire to avoid higher taxes — and there's all this private equity money sloshing around — how's that going to impact earnings multiples and purchase prices?
“Increased activity is going to drive valuations up,” Blaige said. “More people are bidding. The number of bidders for each deal could double because companies are performing better.”
“For a healthy business, [an earnings multiple of] 5-6x is doable,” said Del Pero at FocalPoint. “More likely, we'll see deals in the 4-5x range.”
Nick Merkel agreed that “a good custom molding guy” with some proprietary business “could get 5-6x if he's really good at something.” But Merkel said he also could see offers in the 4-5x range.
McGrew at Morgan Keegan added that “a large business in a protected niche with proprietary technology may get a higher multiple, but not double-digit — high single-digits at the most.”
The Madison Dearborn-Bway deal fit into these predictions, with a multiple of 6. A smaller specialty deal in the materials sector — Solutia Inc.'s $325 million purchase of specialty polymers maker Etimex Solar GmbH — fetched a multiple of almost 10.
New day dawning
Taking all of the plastics M&A events of the first half of 2010 into account, it's safe to say that those who work in the field feel better about its prospects than they did a year ago. Riverside, to name just one example, is looking to add to the handful of plastic-related businesses that it already owns.
“We'd like to do more in the areas of medical plastics, specialty lamination and point-of-purchase fixtures for display,” Kohl said.
P&M's Hart added that “visibility into the near- and long-term outlook has improved significantly from 12-18 months ago, and the credit markets have opened back up for M&A.”
“Overall, we're cautiously optimistic about the increased M&A activity and improved fundamentals. We expect to see increased activity and continued changes to the competitive landscape,” Hart said.
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