While flexible packaging mergers and acquisitions deals typically don't make the splashy headlines of their rigid counterparts, industry watchers are betting that flexibles will join this year's overall M&A rebound.
Several analysts said strategic and private equity buyers will find flexible packaging manufacturers and converters attractive for a variety of reasons.
“The strength and return of the flexible packaging companies speaks to the strength of the end markets these companies serve, and speaks to attracting a lot of capital,” Richard Weil, director of investment banking at Mesirow Financial Holdings Inc. of Chicago, said June 8 at the Global Pouch Forum in Fort Lauderdale.
According to the Flexible Packaging Association of Linthicum, Md., global flexible packaging M&A volume fell off sharply from a high of 350 deals in 2007 to 217 in 2008 and 168 in 2009 — a 52 percent drop — but climbed 35 percent up to 227 deals in 2010.
Wall Street sees flexible packaging firms as ripe for significant earnings-per-share growth, Weil said. Flexibles companies are expected to post EPS growth of 12 percent during the next two years, compared to 11 percent for rigid packaging, 10 percent for folding carton manufacturers, and 5 percent for corrugated packaging makers.
He cited three first-half 2011 flexibles deals as examples of value-added propositions to the buyers:
* January's acquisition of Danafilms Inc. by Germany's RKW SE, one of Europe's largest film extruders.
* Sun European Partners Inc.'s April acquisition of Britton Flexibles Ltd., one of Europe's largest polyethylene film producers.
* Sealed Air Corp.'s acquisition in the first quarter of ProAseptic Technologies, a Barcelona, Spain-based company that designs and manufactures packaging and filling equipment for ultra-clean filled food and beverage products.
Companies that specialize in pouch technologies have several distinct advantages for potential buyers, said Tom Blaige, chairman and CEO of Chicago-based investment baking firm Blaige & Co. LLC. Those advantages including innovation, relatively low use of materials, and ease of transitioning machinery at a buyer's other plants to pouch production, Blaige said June 8 at the forum.
“Technology is the No. 1 value driver. Pouches within packaging represent a leading technology,” he said. “The financial community and corporate types are trying to get growth in their earnings per share like the pouch market because it's got growth and it's got profitability.”
Blaige predicted that pouch manufacturers will reward buyers with high earnings, raising earnings before interest, taxes, debt and amortization multiples in future M&A deals.
Weil said that average EBITDA multiples for packaging M&A transactions hit highs of 8.7x EBITDA for strategic buyers and 7.4x EBITDA for private equity buyers in 2007, before falling to lows of 6.5x for strategics and 5.3x for financials in 2009. With the rebounds that began in 2010 continuing, he predicted that multiples would be closer to 2007 levels for the second half of 2011.
Seen in light of recent recession- related declines, multiples for packaging M&As as a whole in the first half of 2011 are consistent with averages during the first half of the 2000s, John Chrysikopoulos, managing director of Mesirow's investment banking group, said June 28 by phone.
“People still have memories of all the deals that were done in 2007, and the returns so far don't look all that great, because buying at the peak of the market doesn't typically lead to good returns.
“If there is a very high-quality company with high margins, high growth rates, strong market positions, we will see premium multiples,” he said.
Flexible packaging multiples for M&A deals, which lagged behind rigid packaging at 5.5x EBITDA for flexibles to about 6x EBITDA for rigid transaction in March 2009 — the depths of the economic downturn — since have rebounded to 7.1x EBITDA for flexibles compared to about 8x EBITDA for rigids in May 2011, Weil said.
According to Mesirow, the blockbuster packaging deals for the first half of 2011 for plastics were in rigid-dominant companies: Rank Group Ltd.'s recent acquisition of Graham Packaging Co. Inc. for $4.5 billion and Berry Plastics Corp.'s purchase of Rexam plc's beverage and specialty closures business for $360 million.
But Wellspring Capital Management LLC's recent formation of Prolamina Inc. through the acquisitions of Jen-Coat Inc. and Excel-Pac Inc., as well as Mason Wells Inc.'s ownership of Coating Excellence International LLC, were noted as prominent examples of private-equity-backed M&As that could yield long-term positive results for the buyers.
While strategic buyers such as Rank and Berry may slow down their M&A activities in the second half of 2011, Mesirow is betting that at least one large private-equity-based packaging deal will occur in the second half of 2011, since about $500 million in dry powder for M&A is cached in uninvested private equity funds.
“These private equity firms face a decision: They either compete hard and pay full prices for companies, or they give the money back. They can't sit on it and charge a management fee at the end of [each] month; they're looking to put money to work,” Weil said.
Chrysikopoulos said that the expected big second-half deal has a good chance of occurring in flexible packaging. Even if it doesn't, flexible M&A volume should rise.
“The flexible part of the [packaging] industry is a lot more fragmented than the rigid, so there is a lot more room for consolidation. In terms of not the dollar amount but the number of transactions, I see a lot more on the flexible side than on the rigid,” he said.
According to Weil, Berry, Bemis Co. Inc. and Sigma Plastics Group hold 28 percent of the flexible packaging market share, with the top 10 companies in the segment controlling 54 percent.