It would be a lot easier to take the pulse of the plastics mergers and acquisitions market if the market would stop moving for a minute or two.
But that's not going to happen. So we're left to do some guesswork.
Financial executives interviewed recently by Plastics News said that the plastics M&A market seemed stronger in the first half of 2012 than it did in the same period last year. But plastics and packaging data from P&M Corporate Finance LLC doesn't support that impression, showing a 4 percent drop in global deals in that comparison.
The number of industrial deals climbed in that stretch, but deal volume in the construction end market fell considerably, according to P&M, a financial firm based in Southfield, Mich.
The mood is quite different, however, when you talk to M&A pros who are out there working to put deals together in plastics and related markets. Their sentiments point toward a market that's strengthening and that could really spring to life in the second half of the year.
Plastics News recently checked in with several M&A pros to get their takes on the first half — and on what buyers and sellers can expect for the second half of 2012.
Terry Minnick doesn't have to dig too deep to find numbers to back up his claim that things are going well for plastics M&As in 2012.
“We've done four deals in the past five months, and we normally do four or five for an entire year,” said Minnick, president of Molding Business Services in Florence, Mass. “We're seeing a lot of interest in all types of deals.”
Minnick's firm currently is working to find a buyer for a custom injection molder that does a large amount of medical work. Typically, he said, MBS would receive about 25-30 requests for non-disclosure data on that type of firm from interested buyers. This time around, they received 60 requests.
By early June, there were eight offers on the table for the firm, well above the two or three offers that Minnick said would be typical. Why the change?
“If you're selling or buying, you need a certain amount of optimism and a positive outlook,” Minnick said. “Most people we talk to in the business feel pretty good, even if there are some concerns about the election and the economy.”
Scott Eisenberg had a similar experience recently at Amherst Partners in Birmingham, Mich.
“We had a small recycling company get 60 requests for information,” said Eisenberg, who serves as managing director of Amherst. “If a buyer sees a company they like, they get all over it.
“We're finding that buyers are really hungry,” added Eisenberg, whose firm is a member of Imap Inc., a global M&A trade group based in Istanbul. “If they bought a company in 2006 or 2007, they paid too much, and now they're trying to do something about it.”
“A lot of people around the world feel that things are getting better, and that's leading to an increased level of comfort,” said John Chrysikopoulos, a managing director with Mesirow Financial Inc. in Chicago. “They use the stock market as a barometer, and that's higher than it was a year ago. Banks and capital markets are in better shape. There's increased confidence.”
On June 25, the Dow Jones Industrial Average was almost 5 percent higher than it was on that same date in 2011. Andrew Petryk, a managing director and principal with financial firm Brown Gibbons Lang & Co. in Cleveland, said that “the floodgates have opened up” since late April, and that his firm has seen a 25-30 percent increase in deal activity.
“There's a lot of capital available and a lot of interest in doing deals,” Petryk said. “Strategic and financial buyers, both foreign and domestic, are all very aggressive.”
“Our message is that deal activity is down slightly from record levels,” added P&M plastics and packaging group director John Hart. “Packaging deals were flat, but now there's a healthy amount of activity. It's been robust for sellers. We've been noticing a bit of imbalance in supply/demand, and that's from more buyers seeking out quality businesses.”
What's your deal?
Plastics News reported on 82 plastics-related M&A deals in the first half of 2012. March had the most reported deals in the pages of PN, but a true flashpoint occurred in early June. In a single week, PN reported on the following front-page deals:
* Private equity firm Bain Capital Partners LLC bought Consolidated Container Co. LLC, North America's fifth-largest blow molder, according to PN, with annual sales of almost $750 million. Consolidated employs 2,100 at 59 North American sites.
* In another big blow molding deal, Goldman Sachs' unit GS Capital Partners LLC purchased a minority stake in Plastipak Holdings Inc., North America's third-largest blow molder, with annual blow molding sales estimated at about $1.5 billion.
* R"chling Group of Germany expanded its base in North America by acquiring molder and mold maker Advent Tool & Mold Inc.
Another eye-opener hit the market in March when Dart Container Corp. agreed to pay $1 billion for Solo Cup Co. In a merger of two packaging industry titans, Solo had struggled financially since acquiring rival Sweetheart for more than $900 million in 2004. Dart and Solo ranked as North America's second- and third-largest thermoformers, with combined annual thermoforming sales of almost $1.3 billion.
“Every year, we're going to see some large headline deals in packaging,” said P&M's Hart. “And we're going to continue to see those kind of deals because multiples have gone higher.”
“The trend is for larger transactions in the plastics and packaging space. Some bigger targets remain out there,” added Petryk at BGL, which worked on medical molder MedPlast Inc.'s first-half purchase of contract manufacturer United Plastics Group Inc.
Later in March, another well-known plastics industry name changed hands when private equity firm CCMP Capital Advisors LLC bought Milacron LLC — the only U.S.-based broad-line manufacturer of primary plastics equipment — from Avenue Capital and three other investment firms. No purchase price was disclosed. Avenue and its partners bought Milacron out of bankruptcy in 2008 for $175 million. In 2011, Milacron had sales of almost $800 million.
Thomas Blaige, owner of Chicago financial firm Blaige & Co., said he was “surprised how much private equity money was going into plastics machinery businesses” in the first half of the year. “That type of investment isn't typical, because those [machinery] businesses tend to be cyclical,” Blaige explained.
P&M also cited Amcor Ltd.'s $252 million purchase of flexible packaging maker Aperio Group Australia Pty. Ltd. and Cytec Industries Inc.'s $408 million deal for composites maker Umeco plc as “marquee deals.”
A few buyers struck more than once in the first half of 2012.
Private equity firm Arsenal Capital Partners led the way with four plastic-related deals in that six-month period. New York-based Arsenal bought thermoplastic adhesive maker Clifton Adhesive Inc., plastic barrier treatment maker Fluoro-Seal Holdings LLC and pigment dispersion makers Plasticolors Inc. and the Colortrend business of Evonik Industries AG. Arsenal already has combined Plasticolors and Colortrend into a new firm called Chromaflo Technologies LLC.
Industrial equipment maker Nordson Corp. of Westlake, Ohio, made a splash in the North American market by making two plastics-related deals in a three-week period in late May and early June. Nordson paid $200 million each for Xaloy Inc., the largest U.S. maker of screws and barrels, and Extrusion Dies Industries Inc.
And although injection molder Engineered Plastic Components Inc. only made one first-half deal, its April purchase of the assets of Oneida Molded Plastics LLC in Siler City, N.C., was the sixth in 16 months for Grinnell, Iowa-based EPC — and its 16th overall since it opened its doors in 1994.
Minnick and MBS worked with EPC on the Oneida deal and on its late 2011 purchase of injection molder Alladin Plastics. He pointed out that those two deals and two others his firm has worked on this year all took place in the Southeast, where several non-domestic automakers now have plants. Minnick said the Southeast “has been a more business-friendly place” than other parts of the country.
“Strategic buyers are back with a vengeance,” said Petryk. “They have very strong balance sheets, because they've cut back on capital expenditures since ‘08 and focused on their own operations.”
Less skin, higher prices
Improving financial markets required buyers to have lower equity participation when making deals in the first half of 2012. In other words, they had “less skin in the game.”
“Financing is easier to get, and it's moving into middle-market transactions,” said Bill Ridenour, president of Polymer Transactions Inc. in Newbury, Ohio. “Capital structures a year ago were half debt and half equity. Now it's moving to around 58 percent debt and 42 percent equity. Buyers have less skin in the game and that's setting higher prices.”
Hart at P&M said equity participation might be in the high 30s now and could be heading to 30 percent. Chrysikopoulos estimated that equity levels a year ago were around 45 percent, but now are closer to 35 percent. “That's enabling equity returns to be higher and made buyers more aggressive to pay more,” he said of the change.
At a recent financial conference in Cleveland, an official with Riverside Co., a private equity firm that has some plastics-related holdings, said M&A deals that were fetching sale prices of six to eight times earnings before interest, taxes, debt and amortization last year now were getting eight to 10 times EBITDA.
Financial pros interviewed for this story said numbers may be up that much in other sectors, but they were up a little less than that in plastics and packaging.
“It hasn't been a two-multiple jump from year to year,” PTA's Ridenour said. Maybe more like 0.5. Automotive is rebounding, but it's cyclical. The lowest valuations are still in injection molding.”
Hart added that multiples in general are up by 0.5 to one, depending on the type of business. But even that modest increase has many business owners considering a sale, he said. Chrysikopoulos put the year-to-year multiples increase at one.
“We've seen general increases in multiples,” added Petryk. A multiples increase of two “might be true in some cases, but not in industrial like plastics and packaging.”
David Evatz, a director with financial firm Stout Risus Ross Inc. in Chicago, pointed out that credit markets for deals for firms with less than $10 million in EBITDA are improving, and that, in turn, will improve valuations, lifting them closer to sellers' expectations.
Taxes in the U.S., ‘iceberg in Europe'
The mere mention of taxes usually turns smiles into frowns. That might be the case again in 2013 as tax cuts on capital gains and estate taxes are set to expire. A desire to avoid these increases actually could lead to an increase in M&A activity.
Federal capital gains taxes had been reduced to a maximum of 15 percent, but on Jan. 1 those rates will return to a minimum of 20 percent, with some rates approaching 24 percent. Estate taxes had been suspended entirely, but could return to their previous rate of 35 percent.
“If there's an increase in the capital gains tax, that could be a huge bite to business owners and could lead them to sell now,” Ridenour said. “Overall, a lot of business owners are fed up with federal regulations. They're stifling smaller businesses and increasing the cost of doing business.”
The potential tax change “may be a driving force” in second-half M&A activity, Evatz said.
“There's going to be a spurt of selling because of taxes now,” added Blaige. “It's a hot issue.”
Europe's financial and political instability also could affect second-half M&A activity.
“We're cautiously optimistic about the second half — but the iceberg would be Europe,” said Eisenberg. “If not for Europe, we'd be extremely optimistic. The U.S. manufacturing base is incredibly stable, and there's growth in earnings at industrial companies.
“But if Europe goes through a real implosion, all bets are off. If there's a modest restructuring, it's not going to be bad,” Eisenberg said.
“The only question mark is the economic and political situation in Europe,” added Chrysikopoulos.
“Greece, Spain and Italy are going through a difficult time. If economic activity in Europe slows down, it will have a negative impact on the U.S.”
Somewhat surprisingly, none of the analysts contacted for this story expect the upcoming U.S. presidential election to cause much of an increase or decrease in North American plastics M&A activity.
“There's no historical pattern that shows that a presidential election affects M&A one way or another,” Hart said.
Auto-matic end markets
After a few down years, interest has resumed in buying and selling automotive-focused plastics firms. That's what happens when North American auto-build numbers are expected to surge to almost 15 million this year.
“The bloom is back in auto a bit,” BMS' Minnick explained. “No one wanted it in 2008 and 2009. Now it's almost like auto is the new medical.”
Blaige agreed that acquisition-minded injection molders now are starting to look at cyclical businesses like automotive and construction once again.
“Auto is going to be cyclical, but it's on an upswing,” said Evatz of SRR. “Medical and health care are expected to grow consistently based on demographics.”
Eisenberg said that although the automotive market is up from 2011, it is still below the levels it peaked at in the late 2000s. Packaging and medical markets are “a little flatter … but you can still get premium value if you have a proprietary product,” Eisenberg added.
No shortage of capital
At some point, investments pros will stop using terms like “money on the sidelines” and “dry powder.”
But with $400 billion of uninvested capital in the U.S. alone, it doesn't look like that point will be reached in the second half of 2012.
“There's still a tremendous amount of money looking for a home,” said Minnick. “Typically, industry buyers will pay a higher price, but there's no question that private equity will continue to look at the plastics space.”
“Capital that was raised in ‘07 and ‘08 still hasn't been deployed because of a lack of quality deals,” added Evatz. Amherst's Eisenberg identified “tremendous capital” still available at both corporations and private equity funds.
Chrysikopoulos said he believes the absolute levels of uninvested capital “are gradually coming down”; but, BGL's Petryk countered that private equity firms “are still raising a lot of money,” since those firms “are supported by very aggressive debt structures that are continuing to improve.
But even though private equity firms were involved in several first-half plastics M&A deals, their participation rate fell from 33 percent to 40 percent when compared to the first half of 2011.
A seller's market
All of these factors could combine to convince longtime plastics business owners to put their firms on the selling block in the second half of 2012. Every financial pro interviewed for this story agreed that the first half of 2012 was a seller's market — and that such conditions are likely to continue into the second half.
“The financial crisis made [business owners] much more aware of enterprise risk,” Blaige said. “They've seen how global events can affect their business and that makes them more likely to sell.
“It's like they've been hit in the head a lot of times and kind of have a concussion right now,” Blaige added.
“If you wanted to sell at the end of [the 2000s], you probably held on for a few more years to get better terms,” Eisenberg said. “Now you might be 65 years old and say it's time to do something. I think there will be a real rush to get deals done.”
“This is a great time to be a seller in plastics and packaging,” Petryk added.