Any lingering uncertainty from 2009 and 2010 has turned into full-blown optimism in 2011 for the plastics mergers and acquisitions market.
Several M&A pros contacted recently by Plastics News observed the market strengthening in the second half of 2010 with distressed deals being replaced by quality ones and said that they expect this trend of more and better deals to continue on into 2011.
Globally, the number of deals in the plastics and packaging market increased from 340 in 2009 to 384 in 2010, according to P&M Corporate Finance LLC, a financial firm in Southfield, Mich. That's an increase of almost 13 percent.
The number of plastics M&A deals covered by Plastics News increased from 23 in the third quarter of 2010 to 32 in the final quarter of the year.
Among deals tracked by P&M, the consumer end market showed the most growth between 2009 and 2010, increasing 37 percent to a total of 52. The industrial end market remained the largest in the P&M report, growing 8 percent to a total of 136 more than a third of the full-year total plastics M&As.
Among processes, blow molding and film production transactions each notched growth of 23 percent in 2010, according to P&M. In product segments, custom molding deals led the way, with growth of 24 percent over 2009.
The construction end market underperformed in 2010, according to P&M, with the number of deals falling to 40, a drop of 11 percent vs. 2009. In processes, the number of sheet/thermoforming deals shrank 24 percent. In product segments, the number of deals involving industrial products fell 10 percent.
Similar data compiled by Blaige & Co. of Chicago showed an increase of almost 12 percent in global plastics deals, with that total growing to 536 between 2009 and 2010. Three of the four top sectors tracked by Blaige injection molding; pipe, profiles and tubing; and resins, colorants and compounding showed year-on-year growth of at least 23 percent.
Credit markets have improved significantly, and [buyers and sellers] who were on the sidelines have come off the sidelines, said John Hart, plastics and packaging group director with P&M. There's been an increase in trailing earnings and continued economic recovery. If all goes well, 2011 could be pretty robust.
In 2010, not many plastics firms had 12 months of good history to show, according to Blaige President Thomas Blaige. Higher 12-month trailing earnings lead to higher valuations and motivate people to do deals, he added.
Second-half financing got better, said Will Frame, managing director of the Chicago office of Deloitte Corporate Finance LLC. If you average the ups and downs, it's a steady up line. And the longer that goes on, the more confident people become.
Improvements in financing started with larger transactions and then started to trickle down, according to David Evatz, a director with Chicago financial firm Stout Risius Ross Inc.
I think you can show a pretty significant pickup from the first half to the second half 2010, said Elliot Farkas, commercial/ industrial group vice president with investment banking firm William Blair & Co. in Chicago. That's a function of plastic processors now stringing together three or four consecutive quarters of pretty strong results, not just one or two. They've got better results to sell off of.
The reduction in distressed deals where a buyer is forced into a sale by a bankruptcy or similar financial condition also will be a boon to the market, delivering better properties that command higher valuations, sources said.
There are still some distressed situations out there, but they'll become fewer and fewer as long as the economy stays stable, said Bill Ridenour, president of Polymer Transactions Inc. in Newbury, Ohio.
Globally, the number of distressed plastics and packaging deals tumbled from 59 in 2009 to 24 in 2010, according to P&M. Hart described the 2010 total as still a little high, adding that his firm expects it to decrease even further in 2011.
A lot of deals in the first portion of last year were rushed situations, said Frame.
Evatz summed up the situation by saying, Not every buyer is interested in a distressed transaction there's a lot of pent-up demand for healthy companies.
Several big deals lit up the financial skies in the second half of 2010. The biggest dollar-value deal was Rank Group Ltd. owned by New Zealand billionaire Graeme Hart picking up plastics packaging giant Pactiv Corp. of Lake Forest, Ill., in a deal worth almost $6 billion.
Two other billion-dollar deals took place in the second half. Private equity firm Hellman & Friedman LLC paid $1.3 billion for profile extrusion leader Associated Materials Inc. of Cuyahoga Falls, Ohio, while Australian pallet maker Brambles Ltd. paid a similar amount for Dutch competitor IFCO Systems NV.
Private equity firm TPG Capital LP's acquisition of Ashland Distribution, a leading resin distributor, fell just short of the billion-dollar mark, checking in at $930 million.
Blaige identified 13 companies that made at least two plastics acquisitions in 2010, including film and sheet extruder Sigma Plastics Group, which bought McNeely Plastics Products Inc. of Clinton, Miss., as well as a plant operated by Excelsior Packaging Group in Vancouver, Wash.
On the other side of the equation, Blaige cited Dow Chemical Co. as the top seller in the 2010 plastics market, as that firm found buyers for five plastics-related businesses.
P&M's Hart listed the TPG-Ashland deal as a key second-half deal in 2010, as well as New York private equity firm Irving Place Capital acquiring blow molder Alpha Packaging Inc. of St. Louis.
Many people in plastics and packaging are more confident heading into 2011, said Frame at Deloitte. We've seen the end of crazy crisis-driven things. People are looking longer-term it's not a short-term cash conservation. They want to grow again. They want new products and packaging and closures that will encourage their customers to buy more stuff.
And even if the U.S. economy muddles through a longer period of lower growth and relatively high unemployment, that might make steady-performing plastics packaging companies more attractive in the M&A market.
Packaging has held a lot of attraction over time, said Farkas at William Blair. It's less cyclical than other industrials. The dynamic is still there for packaging to be attractive.
We could get to a point where 'steady eddies' like packaging companies might get more attractive, said Stewart Kohl, co-CEO at private equity firm Riverside Co. in Cleveland. Other sectors might have too much variability.
Riverside has been an active participant in the plastics market in recent years, selling off three plastics firms since 2008 before buying PVC window maker Sunrise Windows Ltd. last month.
You can do OK in areas like packaging, said Frame. In high-growth times, you might be growing 6 percent when everyone else is growing 20 percent, which doesn't look good, but if you're doing 2.5 percent when everyone else is doing 1 percent, that makes packaging a rock star.
Lower economic growth could spur action in other ways, said Steve Arnold, M&A research director at William Blair. If you've got lower organic [gross domestic product] growth, you might have to do transactions to have a good growth rate, he said.
A 2011 increase in capital gains taxes also played a role in some deals getting done by the end of 2010, although that impact may not have been as big as some had expected.
Farkas at William Blair cited the highest number, saying that more than a quarter of deals finished in 2010 were affected by tax changes in some way. The early stages of 2011 could even see a slight drop-off in deal volume without the tax change in play, added PTA's Ridenour.
Better access to credit and financing in 2011 also could level the playing field between private equity buyers and strategic buyers from within the plastics industry. For the last couple of years, tighter credit and higher equity requirements had given strategic buyers a bit of an edge.
In most pure financial deals [in 2009 and 2010], to do a platform, private equity had to put in 40-50 percent equity, Blaige said. That's twice as much as they want to put in because that dilutes returns. If you were house shopping and had to do that, you'd be asking for a cheaper house.
Percentages of equity contributions for private equity had peaked at 50 percent in recent years, according to Hart at P&M, but now are back in the 30s and 40s. In the market's heyday, that number was in the 20s, which led to higher valuations, he said.
Over the last 12-18 months, strategic buyers had the advantage, said Evatz at SRR. Particularly those with a cash balance and no financial contingency. [Strategic buyers] didn't have as many risks as financial buyers that had to raise outside capital.
But going forward, private equity and financial buyers will have more access to capital, he added. They may be able to pay more to offset risk, so the advantage of a strategic buyer may be less.
In 2011, private equity could be driven to make more deals involving value-added specialty products, or to consolidate in order to make businesses more efficient. Ridenour cited as an example a recent consolidation deal in which private equity firms Capstone Capital Partners LLC and Highlander Partners LP bought thermoset compounder and molder Premix Inc. of North Kingsville, Ohio, and simultaneously announced plans to merge Premix with composite molder Hadlock Plastics LLC.
Blaige listed the sale of packaging converter Plastic Packaging Technologies LLC of Columbus, Ohio, to private equity firm Mid Oaks Investments LLC a deal in which Blaige's firm was involved as the type of private equity deal that the market might see more of in 2011.
Mid Oaks was the top bidder in that deal, and they were able to get cash-flow financing for a high-end deal, he said. There's a flight to quality.
Another impact of an improving plastics M&A sector has been an increase in the size of earnings multiples paid to make acquisitions. Ridenour said that his firm's research indicates that multiples are back to 2007 levels, prices that were paid before the economic meltdown of 2008.
The multiple range seen in the U.S. plastics market increased from 2.5-8x in 2009 to 3-10x in 2010, according to PTA. Arnold at William Blair cited 6.5x as a median multiple and said that 2007 levels have been reached in some cases.
At SRR, Evatz said his firm has seen increasing valuation levels across subsectors, with medical plastics deals leading the way with multiples of 8-10x and with packaging not too far behind at 6-8x. Industrial plastics deals would check in at 5-6x, with automotive at 4-5x and improving.
Multiples aren't quite at '07 levels, particularly for financial buyers, who aren't yet paying as much as they could, Evatz added. The difference [in multiples] among sectors has been pretty consistent. As more healthy companies come into a market that's had a lack of quality deals, multiples could increase.
Overall, it sounds like the animal spirits those deal-driving forces that spur business leaders and entrepreneurs to take greater risks in search of high growth are stirring in the 2011 plastics M&A market more than they have in several years. Some financial pros interviewed for this story said that plastics M&A deal volume in 2011 could be up 20 percent or more vs. 2010.
Conditions are there for deals where buyers and sellers are both happy, said Frame. In 2009 and 2010, a lot of sellers weren't happy.
For 2010, the market was still in the process of healing, Riverside's Kohl said. Basically, every quarter balance sheets were in better shape and now sellers can get a fair price. All together, that's a pretty powerful force.
Blaige said that, so far, he's judging 2011 by the types of conversations he's had with plastics business owners.
Typically, in the last few years, an owner would say 'Times are slow, give me a call next year and we'll talk,' Blaige said. Now they're saying that if they're standing still, that means their competitors are gaining ground on them.
2011 could be a good year. A lot of companies had a year of good performance [in 2010] and feel like they're out of the woods.
He added, I think a lot of family businesses will be going to market [to be sold] in 2011. A lot of them looked at it in the late '90s, but first we had the tech bubble and then 9-11. That put a damper on selling and some of that business never came back. But 2011 could be a good year for getting a good price.
At SRR, Evatz said he'd advise a plastics business owner to sell in 2011 if the company has a niche in the market, or has a handful of competitors vs. 100, or does something that others can't do.
If you're evaluating your options and one option is to sell, 2011 could be an attractive option relative to 2010, he said.