Diversified plastic packaging leaders have aggressively expanded their capabilities in caps and closures, and the smart money is on further consolidation within the segment, a panel of industry experts said.
At the Plastics Caps & Closures 2011 conference, held Sept. 12-14 in Atlanta, panelists identified several trends in plastics, packaging, and caps and closures manufacturing that bode well for makers of products that increasingly are seen as highly engineered, value-added commodities.
“We built our company over the years through the acquisitions, but by design. I can assure you that our [acquisitions] aren't because we have a big CEO ego, or [are] trying to grow top-line sales. It really is how we build a comprehensive packaging solution for our customers,” said Brett Bauer, executive vice president of strategic corporate development at Berry Plastics Corp.
Evansville, Ind.-based Berry recently acquired Rexam plc's largely North American-based specialty closures business. The $260 million deal allowed London-based Rexam to shed an underperforming business unit and, according to Bauer, gave Berry more than simply access to new closure designs for plastic tubs and tubes.
“We always were a player in the beverage side, but not so much in water and [carbonated soft drinks], so this does give us an entry into [that sector] and rounds out our product offerings in a broader perspective,” Bauer said.
With 32 acquisitions under its belt in the last 23 years, Berry — whose sales have grown from $150 million in 1995 to $5 billion — is one of the strategic buyers that traditionally have dominated mergers and acquisitions in the caps and closures market.
But packaging industry watchers John Hart and Tim Burns said the middle market — companies with $20 million to $250 million in annual sales — is emerging as the best place to be for M&As.
Hart, director of the plastics and packaging group at P&M Corporate Finance LLC in Southfield, Mich., cited P&M figures from 2006-11 that show dramatic consolidation in caps and closures, a push by private equity buyers into the field and a dramatic rebound in M&As for the segment over the period spanning the high point of packaging M&As and the depths of the recent global economic downturn.
During the five-year period:
* Four caps and closures leaders — Amcor Ltd.'s White Cap, Erie Plastics Corp., Owens-Illinois Inc. and Rexam's closures unit — were bought by larger competitors.
* Six industry leaders — Berry, Closure Systems International, Guala Closures SpA, Mold-Rite Plastics Inc., Plasticum Group BV and Portola Packaging Inc. — changed to private equity-backed ownership.
* Eleven leaders acquired 27 of their competitors via strategic acquisitions.
In 2006, P&M tracked 16 M&A deals involving caps and closures consolidation, with 13 deals being made by strategic buyers and the remainder by private equity firms. After declines in 2007, 2008 and 2009 — the lowest point in the cycle, with nine deals, split 5-to-4 in favor of strategics — the number of caps and closures M&As rebounded and is projected to reach 18 deals in 2011, with 10 originating from strategic buyers and eight from private equity.
Hart said a good example of a private equity buyer in the middle-market space is Irving Place Capital, a New York-based firm with $2.7 billion in investments. Irving Place's recent purchase of Mold-Rite and bottling leaders Progressive Plastics and Alpha Packaging illustrates long-term vision to offer integrated closure and bottle supply.
“They come in, they make a platform acquisition … and then they seek to create value by taking that small to midsize company and adding to it, and giving [it] the benefit of additional capital resources, the benefit of scale through M&As [and] the benefit of broadening out a product line or a technology,” Hart said.
Middle-market firms have an advantage in the age of concentrated large markets with high volumes and low profitability: short runs, rapid stock-keeping unit (SKU) proliferation and increased focus on research and development. Smaller and faster companies can become very attractive to bigger players, Hart and Burns said.
Burns, president of Cranial Capital Inc. in Solon, Ohio, advised middle-market firms: “Run those bad contracts out. Get rid of that equipment that's not optimizing your production and plants. Think small, specialized and speedy.”
Among big-ticket M&A players, Hart singled out New Zealand's Rank Group Ltd. — whose recent buys of CSI and Graham Packaging Co. Inc. have given it huge market share — and Apollo Management, Berry's majority owner, as private equity firms with aggressive, long-term caps and closures strategies.
In the ranks of strategic buyers, Burns likes AptarGroup Inc., a Crystal Lakes, Ill.-based firm that specializes in dispensing closures and pumps for cosmetic, personal-care, household, food and beverage, and pharmaceutical products.
Aptar has done deals from $10 million to $150 million while remaining debt-free on a net basis, and places heavy emphasis on innovation, he said.
“They're the kind of company that doesn't buy much, but what they buy has a lot of meaning, and it's combined with an ongoing capital program that's to serve markets and specialty end-use applications. That's how you create value,” Burns said.
Recently, Aptar acquired H. Engelmann SA and CCL Dispensing Systems LLC, boosting the group's international presence and increasing sales from $1.6 billion in 2006 to $2 billion in 2010.
Berry is unique among the largest caps and closures companies because it can be viewed as both a strategic buyer looking to add to existing product lines and as a private equity firm that is mindful of the bottom line for its investors.
Bauer, who was chief financial officer of Venture Packaging Inc. before Berry acquired it in 1997, noted another unique thing about Berry — while Apollo owns 27 percent of Berry, Graham Partners owns 7 percent and Goldman Sachs Capital Partners retains 1 percent — Berry management owns 22 percent. Goldman Sachs, along with JPMorgan Partners, sold Berry to the others in 2006.
Unlike some management-ownership deals, where only a few top executives are involved, Berry's employee ownership pool is some 500 people deep, he said.
“So, when we go out to market, you're literally talking to the owners of the business,” Bauer said.
That has driven an “empowering culture” at Berry, where newly acquired businesses can be evaluated to find the best in-place managers and technology innovators and then retain them, he said.
“We try to put some goal posts in there, give [newly acquired employees] resources, and let them run,” he said.
Plastics Caps & Closures 2011 was organized by Plastics News Global Group.