AKRON, OHIO (July 12, 11:30 a.m. ET) — The plastics mergers and acquisitions market continued its comeback in the first half of 2011, with the number of deals, earnings multiples paid and total valuations going up, up and up.
Not only did the number of deals increase in the first half — even when compared to a robust first half in 2010 — but the quality of companies involved in those deals also improved considerably, say several M&A professionals who spoke with Plastics News.
The number of M&A deals in the global plastics and packaging arena — as tracked by financial firm P&M Corporate Finance LLC of Southfield, Mich. — rose almost 5 percent in the first half, reaching a total of 202. Big gains were posted in the industrial, consumer and construction end markets, which were up an average of 35 percent vs. the first half of 2010.
Declines of 22 percent in food and beverage and of almost 50 percent in medical were the result of being compared to extremely strong first-half numbers for both of those areas in 2010, according to P&M plastics and packaging group director John Hart.
Among product segments, building products led the way with a 55 percent leap in the number of first-half 2011 deals vs. the year-ago period, according to P&M data. The custom molding segment again led the way, accounting for 19 percent of total deals during the first half of this year. In sectors, injection molding remained the largest, capturing a 27 percent market share.
Packaging remained a strong category in general for plastics M&As during the first half, with a number of market watchers saying that numerous consolidation opportunities remain in that area.
“The mix of deals is changing,” Hart said. “There are fewer smaller and distressed deals and more quality and high-profit deals.”
“2010 was a record year, and trying to replicate a record year is hard to do,” he added. “I thought it was going to be challenging, but we've seen a very strong M&A environment.”
Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Newbury, Ohio, also saw good things in the M&A field in the first half of 2011.
“Things are picking up,” said Ridenour, who pegs first-half volume growth for plastics-based deals at about 12 percent vs. a year ago. “Prices are up, and that's enticing sellers into the marketplace. Earnings are also up — above what we might have expected in 2009 and 2010,” he said.
Ridenour's firm also estimates that earnings multiples paid for plastics firms with annual sales of between $10 million and $50 million increased from 4-7x in 2009 to 5-8x in 2010 and the first half of 2011. In the $50 million to $100 million sales range, multiples during that time grew from 5-8x to 6.5-9x, Ridenour said. For plastics firms with annual sales of more than $100 million, growth for earnings multiples was from 6-10x to 7-10x.
Financing opens up
Financing from banks and other lending institutions has been easier to attain in the first half, as both buyers and firms being acquired have a longer track record of recent growth.
“The value of deals has gone up because of the financing environment,” said David Evatz, a director with Chicago financial firm Stout Risius Ross Inc. “Financial buyers are paying more for acquisitions, whereas a year ago they were constrained by financial markets.”
“Financial markets continue to improve based on deals going forward,” added Hart at P&M. “I've been surprised at some financial deals. There have been a lot of favorable interest rates and terms.
“The credit market for M&A is strong right now and that's helping financial buyers,” Hart said.
“If the worst was 2009, that's already a while ago,” said Will Frame, managing director of the Chicago office of Deloitte Corporate Finance LLC. “Now a lot of companies have 12-18 months of solid returns behind them and are back on track.
“Valuations are moving upward,” Frame added. “There are still some decent quality businesses with good track records coming to market.”
The “No. 1 feature” of the first half of the 2011 M&A market “is that companies are doing better,” according to Thomas Blaige, chairman and CEO of Blaige & Co. financial firm in Chicago.
“2009 was horrible. You're not going to be selling when things are down,” Blaige said. “Now, you have more [positive] trailing data. Companies are coming out of the woods after the recession.”
In the first half of 2010, few plastics firms up for sale were doing so by choice, Frame said.
“They needed cash or there was another driver [in 2010],” he said. “They really had to do this. This year, they're choosing to come to market.”
Private equity on rise
The number of deals involving private equity firms increased from 28 percent in first-half 2010 to 34 percent in the most recent first half, according to P&M. Readily available financing and investors anxious to spend played a role in the increase.
“Private equity is catching up to strategic buyers,” said SRR's Evatz. “Strategics are still paying more [for acquisitions], but the gap is narrowing.”
Private equity firm Riverside Co., based in Cleveland, expanded its plastics holdings late last year when it bought PVC window maker Sunrise Windows Ltd. of Temperance, Mich. Riverside co-CEO Stewart Kohl said that his company had “an outstanding management team” and that Riverside is “an example of the type of fine companies that are out there.”
“My sense is that it's a pretty fair fight in strategic vs. financials,” Kohl said. “And a lot of financial and strategic buyers are coming to the plate.”
In spite of the growth in private equity in plastics M&As, Frame said the market isn't quite back to the levels of 2007, when easy financing allowed private equity buyers to outbid strategic ones.
“Where there's a real rationale for a deal, strategic buyers have advantages that private equity can't match,” he said.
Skin still required
One area of the plastics M&A field that hasn't returned to 2007 levels is equity participation. Around 2007, deals sometimes were done with as little as 20 percent equity participation, with the rest of financing coming from lending institutions. Now, such deals require a 50 percent stake, and that might not move much in years to come.
“Fifty [percent] is still the level of equity participation,” Blaige said.
“Financial buyers all buy on a return model, so when they invest like that, they almost have to double down by lowering costs, growing faster or making cuts” at the firms they acquire.
At SRR, Evatz said his firm “still sees equity requirement in the 40-50 percent range — and it may have been only 20-30 percent at the peak of the market.”
Fifty percent equity participation “is pretty high,” according to Riverside's Kohl, “but 20 was very low. We might be in the 30-35 percent range in the next couple of years.”
Frame said that he believes future equity participation in plastics M&As will be between 33 percent and 40 percent.
Taking a closer look
A number of individual plastics M&A deals drew the notice of financial pros in the first half.
Reynolds Group Holdings Ltd.'s swooping in — with the backing of New Zealand's Rank Group Ltd. — to outbid Silgan Holdings Inc. for Graham Packaging Co. Inc. definitely garnered a lot of attention.
“Rank came in and stole the deal, but it wasn't a huge surprise,” P&M's Hart said of the successful $4.5 billion offer.
Rank, controlled by New Zealand billionaire Graeme Hart, last year had acquired North American packaging giant Pactiv Corp. for $4.6 billion.
And though Reynolds/Rank ended up outbidding Silgan by about 15 percent in the Graham deal, SRR's Evatz said the eventual purchase price was in line with recent sales in that sector. Blaige said he thought the successful bid was “a little low” based on recent earnings at Graham.
Blaige described the Graham sale — as well as the first-half sale of plastics machinery maker Husky International Ltd. to Berkshire Partners LLC and Omers Private Equity Inc. — as “failed IPO alternatives” that took place only when investors sought out “alternate outcomes” to recent initial public offerings at both firms.
“There are fewer big companies around to buy these types of behemoths,” he said.
Blaige also singled out Inteplast Group Ltd. as a “serial acquirer” in the plastics M&A sector. The Livingston, N.J.-based packaging firm has been involved in five film- and bag-related purchases since mid-2010, Blaige said, including:
* Pinnacle Films Inc. of Charlotte, N.C.
* Nina Plastics Inc. of Orlando, Fla.
* Salerno Plastics Corp. of Châteauguay, Quebec.
* Vifan USA Inc., the Morristown, Tenn.-based biaxially oriented polypropylene film unit of Italian conglomerate Vibac Group.
* The Speci-Gard bag-making unit of S. Walter Packaging Corp. in Hauppauge, N.Y.
Other quality deals Blaige cited were Kohlberg & Co. LLC's purchase of Phillips Plastics Corp. — North America's 17th-largest injection molder, according to Plastics News — and German extrusion firm RKW SE's buy of Dana- films Inc., a top 100 film and sheet maker in Westborough, Mass.
In the Kohlberg-Phillips deal, Blaige said Hudson, Wis.-based Phillips maximized its value by selling itself as a medical firm rather than a custom injection molder. The RKW-Danafilms deal was made possible when RKW “found a firm with high-quality film assets that could produce to the German standard,” he said.
One deal that seemed a bit confusing to Blaige was packaging giant Sealed Air Corp.'s $4.3 billion purchase of cleaning products maker Diversey Inc. He described that deal as “a bubble-wrap maker getting into chemicals.”
Another high-priced first-half deal came when packaging giant Berry Plastics Corp. paid $360 million cash for the beverage and specialty closures business of Rexam plc. The unit had 2010 sales of about $500 million and employs 1,500, making closures, jars and other specialty plastic products.
Custom extrusion firm Pexco LLC of Atlanta also made a pair of deals in the first half, acquiring extruded plastic edging maker Patrician Products Inc. of Hicksville, N.Y., and custom medical extruder Multitube Medical Devices SA de CV of Mexicali, Mexico.
Reaching a peak?
Kohl — drawing on more than 25 years of market experience — said that the M&A field might be seeing peak multiples right now, with many deals drawing earnings multiples of 6-7x. He cited “experience at watching the market and in buying and selling companies” as reasons for his peak comment. Riverside's purchase of Sunrise was the 300th transaction the firm has completed in its 23-year history.
At P&M, Hart said that while the market may be approaching a peak, it still has “a little room to go up.”
“There's still a large overhang of demand, and that's driving up valuations and multiples,” he said.
But at Deloitte, Frame said he doubts a market peak is in view just yet. “I don't think we're approaching a peak,” he said. “There are some deals that got through at more than $1 billion [in sales] at pricing that looks like a peak. But I don't see multiples like that for $100 million [sales] transactions.
“There's still buyer-seller balance and valuations have firmed up,” Frame added.
The road ahead
And what lies in store for the second half of 2011, as the world of plastics M&As continues to work its magic?
PTA's Ridenour said he expects “to look good for at least the next six months,” with possible increased interest in U.S. assets from European firms because of the recent strength of the euro vs. the dollar.
The second half of 2011 “could be as good or better than the first half,” predicted P&M's Hart, as suppressed sectors such as building and construction continue to recover.
And though Blaige said “megadeals are moderating,” he added that pricing in midmarket deals “is bumping up” and there should continue to be “a huge flight to quality” in the second half.
Frame believes buyers are starting to understand the new, more optimistic view of the M&A market.
“Buyers are more willing to be a little generous in looking at projections — they're more prepared to increase multiples,” he said. Frame added that recent M&A growth “isn't some unsustainable blip.”
“It's not like we see a window that's going to close,” he said. “In the very near and medium-term, we're bullish.”