Mid-sized processors under pressure to grow

CHICAGO — Sandwiched between large suppliers and large customers, many plastics processors are feeling the squeeze and they ought to feel the need to push back some how to keep their positions, according to experts.

The immense pressure put on small and mid-size companies is going to intensify and those without a strategy will find it harder to compete, said investment banker Thomas Blaige, CEO of Blaige & Co.

“Essentially the independents are under attack,” Blaige told business executives and representatives at the Plastics News Financial Summit on April 2 in Chicago.

His firm's data on almost 1,500 plastics processors indicates 76 percent of companies are under $50 million and 84 percent are under $100 million. A lot of family businesses and entrepreneurs make up the mix and they have some big decisions to make in an industry where the large and strong have staying power because of access to capital.

“This problem is for eight out of 10 plastics processors to determine where they go and what they do,” Blaige said, adding that he is issuing a call to action.

He said plastics processors can join forces, sell, stay independent, try to grow or even shrink by divesting a product line or division.

Strategic buyers are making acquisitions to broaden their product offerings and offset their slow and declining growth areas.

However, the private equity groups are the most active acquirers, especially in the injection molding, film and sheet, and blow molding segments. Sixty percent of the top 50 blow molders — 35 companies — merged or sold from 2001 to 2012.

In almost the same period, private equity capital has increased ten-fold to $500 billion as more firms form and individual investors, such as Baby Boomers, follow institutional investors.

“They've become more aggressive. They've become more specialized. They've become a force,” Rick Weil, managing director of Mesirow Financial Inc., said of private equity's uninvested capital looking for a home.

Mid-size competitors also have become viable acquirers for small- and mid-size businesses. Some privately held processors with sales of $250 million to $750 million are aggressively looking for $50 million to $100 million companies to get to the $1 billion mark to compete against $2-billion-and-up companies.

However, reaching the $100 million mark also translates into staying power.

“Get to $100 million and you're bigger than 84 percent of your peers,” Blaige said. “That's a pretty strong position to have. You target $100 million when you're at $20 million to $50 million and it's a doable strategy.”

Weil said about 25 percent of mid-market deals have traded at valuation multiples north of 7.5 times earnings before taxes, depreciation and amortization (EBITDA), which is a common indicator of a company's financial performance.

Mergers and acquisition activity shows that the plastics industry has been protected from gyrations and dips common in other markets.

“The industry is benefitting from the transition of non-plastic to plastic materials,” Blaige said. “The cyclical attributes of other industries are insulated somewhat in plastics and I think that translates to higher value and a premium for plastics companies if you can articulate that.”

In addition, initial public offerings (IPOs) are coming back after about a three-year hiatus. Blaige said that's a sign that valuations are peaking in the industry.

Ply Gem Holdings Inc., a manufacturer of exterior building products, went public last May. Pipe maker Advanced Drainage Systems Inc. will be the next plastics giant to offer an IPO.

The industry is shaking out.

“You sort of have the haves and have nots,” Blaige said. “It's an 80-20 rule. Ten percent of the people are sort of leading the charge. They're consolidators. They're ahead of the curve.”

The bottom 10 percent of companies are struggling with financial problems and may not be very profitable. The 80 percent in the middle should be thinking about their next step, Blaige said.

“You have time to do something,” he added.

But the clock is ticking.

“We're in the fifth year of an upcycle,” Blaige said. “I'm not sure if it's a seven- or 10-year cycle. We think it can change fairly soon.”