AKRON, OHIO (Jan. 24, 10:30 a.m. ET) — The plastics mergers and acquisitions market cooled off in 2011 after a red-hot 2010, but the market still has plenty of momentum as it heads into 2012.
The number of global plastics M&A deals fell about 10 percent to 353 during 2011, according to financial firm P&M Corporate Finance LLC of Southfield, Mich. But that total still ranks second among totals from the last seven years.
Tracking slightly different data, other firms had mixed views of 2011. Officials with Blaige & Co. and Stout Risius Ross Inc., both of Chicago, said 2011 was flat vs. the prior year, while officials with Polymer Transaction Advisors Inc. in Newbury, Ohio — tracking mostly U.S. data — said 2011 deal volume was up almost 9 percent vs. the prior year. PTA tracked 150 North American plastics deals last year.
Regardless of their differences of opinion, M&A officials recently contacted by Plastics News agreed the market hasn't run out of gas as 2012 unfolds.
“Things started to normalize in the third quarter” of 2011, said John Hart, P&M plastics and packaging group director. “For 2012, we expect to see deal activity continue at the levels we saw in the second half of 2011. We should still see deal volume of 300-plus [for 2012], but not at the record level of 2010.”
P&M's statistics look at plastics deal volume by end market, sector and product segment. The best-performing end market for 2011 was consumer, which grew by 20 deals, or 38 percent. Medical deals saw the greatest decline, with 17 fewer deals, for a 45 percent drop.
In sectors, sheet and thermoforming produced seven more deals in 2011, for growth of 35 percent. Specialty processing deals fell by 24, or 44 percent.
Building products was the fastest-growing product segment in 2011, with seven additional deals for growth of 26 percent. The resin segment saw the steepest reduction, sliding by 19 deals, or 36 percent.
Private equity firms increased their market share of done deals to 32 percent from 27 percent between 2010 and 2011, according to P&M. Private buyers saw an almost identical decline in participation, sliding to 25 percent from 31 percent.
And with the global economy improving, the market share occupied by distressed deals fell to 3 percent from 6 percent in the same comparison.
“The positive [M&A] trend for most of  continued in spite of slow economic growth,” said John Chrysikopoulos, a managing director with Mesirow Financial Inc. in Chicago. “Companies had the desire to use extra cash to do more than just pay down debt.”
The increased number of building products deals came as a bit of a surprise since that market has been in the doldrums for several years, mainly because of the dizzying downward spiral in residential housing. Some financial pros think a bottom has been reached and more plastics-related building and construction deals may be seen in 2012.
“We might see some distressed deals, and deals for businesses that are underperforming, at the bottom of the cycle,” said David Evatz, a director with SRR.
“There's been some recovery in building and construction,” added Hart at P&M. “A lot of issues in that market have been flushed out.”
But other pros aren't convinced of the construction market's viability just yet. “We're still not seeing good numbers in construction,” PTA President Bill Ridenour said.
And even though the number of global plastic packaging deals fell about 10 percent last year, that category continues to hold promise and opportunities for consolidation.
Packaging companies “are at a much better point to sell their business,” said Thomas Blaige, chairman and CEO of Blaige & Co. Packaging “remains a pretty consistent theme” in M&A, added Evatz at SRR, since packaging firms typically are better able to sustain a recession and have an easier time passing through costs and price increases.
Andrew Petryk, a managing director and principal with financial firm Brown Gibbons Lang & Co. in Cleveland, described packaging as “an industry where there were a lot of mom-and-pop upstarts because there had been a low barrier to entry.”
“You used to be able to just get machinery and start pumping out plastic products,” he added. “Then suddenly you had a lot of companies with [$10 million to $20 million] revenue levels.”
Mesirow recently took a look at a much-discussed topic in the plastics M&A field — the amount of “money on the sidelines” or “dry powder.” The firm calculated that in the U.S. alone during 2011, there was $456 billion in uninvested private equity funds available. That number represents only a 2 percent drop from 2010 — so why isn't the money being invested in plastics or in other sectors?
“More uninvested money will be spent by the end of 2012, Mesirow's Chrysikopoulos said. “But private equity funds are more selective and more focused on their growth.”
Blaige was more blunt in his assessment. “The amount of private equity funds raised is still high,” he said. “And until economic conditions improve, the amount of private equity available isn't going to change.”
Ridenour added that many private equity group offerings are oversubscribed. “They have a certain total they want to raise,” he said. “But sometimes they get more and they take more because they're seen as being better than other investments like the stock market.”
“There was some big fundraising in 2007 and 2008,” said Evatz. “Some financial buyers and private equity groups were looking at distressed deals or were only looking at certain sectors.
“But there haven't been enough opportunities for them to invest, and they're not going to acquire something if it doesn't fit. They'll just wait another year.”
At financial firm Morgan Keegan & Co. Inc. in Memphis, Tenn., Managing Director Frank McGrew said there's now a “cumulative overhang” in private equity. “These are primarily institutional funds or pension capital invested in private equity,” he explained. “They're looking at multiyear opportunities to get 20 percent returns. They've committed capital to do these deals.”
“Private equity is looked at as alternative investment,” added Petryk at BGL. “It amazes me that every day it seems like a new [private equity] fund is being formed.”
The uncertainty of this year's U.S. presidential election and a capital gains tax increase that will take effect in 2013 also could affect plastics M&A activity in 2012.
The election could make buyers and sellers more reluctant to do business, especially if it leads to changes in policies regarding the environment or other areas.
“There's always some impact from an election year,” Blaige President Edwin Parkinson said. “Republicans are usually thought of as more business-friendly, but there's turmoil in other parts of the world as well. There's uncertainty over taxes, medical costs, the environment.”
“The economy is in a ‘watch and wait' mindset because of the election,” Ridenour said. “And long-term fundamentals still don't look good because of total federal debt. It's now 110 percent of annual [gross domestic product], and if you factor in state and local debt, it's 130 percent. And we can't spend our way out because tax revenue isn't increasing.”
The capital gains tax increase could amount to 5 percent, taking the rate from 15 percent to 20 percent, although some believe it eventually could reach even higher. That in turn might lead business owners to look to sell in 2012 before the government takes a bigger chunk of proceeds from those sales in 2013.
Big-number plastics packaging deals from Rank Group Ltd. [paying $4.5 billion for Graham Packaging Co. Inc.], Sonoco Products Co. [$550 million for Tegrant Corp.] and Berry Plastics Corp. [$360 million for the closures business of Rexam plc] drew headlines in 2011. The Rank-Graham deal was the biggest of the year globally, both in plastics and non-plastics packaging, according to Mesirow.
Other firms made their marks with multiple smaller deals. Extrusion firm Pexco LLC of Atlanta, for example, made four acquisitions during 2011, including profile extruder RDC Cytex Inc. of Houston. Pexco is owned by private equity firm Saw Mill Capital LLC of Briarcliff Manor, N.Y.
Plexco “is doing exactly what they should be doing,” Blaige said. “That's the same stratgey being used by companies all around the world.”
Blaige also cited several strong deals in the medical plastics sector, including Hudson, Wis.-based Phillips Plastics Corp.'s $143 million purchase of medical injection molder Medisize Corp. of Vantaa, Finland. McGrew singled out Schauffhausen, Switzerland-based Georg Fischer AG's $50 million buy of PVC pipe maker Harvel Plastics Inc. of Easton, Pa., as “a healthy, opportunistic deal.”
But McGrew also mentioned the 2009 dissolution of PVC pipe maker Freedom Plastics Inc. of Janesville, Wis., as an example of what happens when multiple assets are available in a single sector, causing buyers to be “in no rush to buy.” The assets of Freedom — which was heavily exposed to the residential construction market — eventually were sold to four different companies for a total of $11.5 million.
Mesirow also was involved in the deal that added pouch maker and printer Excel Pac of Montreal to Lake Forest, Ill.-based packaging converter Prolamina Corp. in March. Prolamina followed up in August by buying some assets and a book of business from Packaging Dynamics Corp. of Kaukauna, Wis. Prolamina now has made three acquisitions since 2010.
Hart called the Rank-Graham and Berry-Rexam deals, as well as PolyOne Corp.'s $486 million deal for liquid color maker ColorMatrix (see related story this page) — “marquee deals” for 2011.
“We'll continue to see big deals in packaging,” Ridenour said. “It's a commodity business where you can squeeze out costs. There's still room to go.”
Most M&A experts contacted for this story said bank financing was more readily available in 2011, and that trend should continue in 2012. “If you as a buyer have to stretch to pay more than you can,” Ridenour said, “that will improve competition.”
But longer-term, Blaige said he's concerned about the business environment for small firms.
“If it doesn't improve, there's going to be a major impact on the plastics industry,” Blaige added. “A lot of companies could be decimated. We need better small-business investing.”
At Morgan Keegan, McGrew identified three ingredients needed for a successful M&A market.
“You need cash, credit and confidence,” he said. “Right now, companies are slow to deploy cash. Until there's a better sense of clarity, corporate balance sheets will remain at an all-time high.
“Credit is still generally available. The cost to funds is about the same. As for confidence, companies are having a harder time getting boards and CEOs to initiate game-changing transactions. They're looking more at bolt-on and add-on acquisitions, which should continue to be dominant. And they can do that because there's a lot of excess capacity in the industry.”
Blaige urged those looking into plastics M&As to take a long-term view: “The forces of global consolidation are stronger than the annual ups and downs. Deal volume in the plastics industry is 25 percent ahead of its 10-year average. It continues to remain strong.”