It's becoming a seller's market for plastics firms

The pace of plastics mergers and acquisitions activity slowed a bit in the second half of 2014 — but market watchers have high expectations for 2015.

Financial firm P&M Corporate Finance tracked 165 deals in the last six months of 2014 — down about 6 percent from the first-half total. The full-year total of 341 was up 4 percent vs. full-year 2013 and close to the market's seven-year average of 347 deals.

The automotive end market showed the greatest annual growth in plastics M&A, with the number of deals in that sector more than doubling, from 19 to 39. The industrial and food and beverage end markets also each posted double-digit percentage hikes from 2013 to 2014.

Deals in the consumer end market, however, slumped 31 percent, falling from 42 deals to 29 in the same comparison.

Based on process, injection molding had the best growth rate in plastics M&A in 2014, jumping 10 percent to a total of 95 deals. Thermoforming and sheet had a year to forget, with the number of deals in that process category slipping almost 40 percent to 23.

Packaging again played a big role in plastics M&A in 2014, accounting for 29 percent of all deals, but that share was down from 36 percent in 2013. The number of global plastics M&A deals that involved U.S.-based firms remained steady at 43 percent in 2014, down only 1 percent from the 2013 level.

“I don't view [2014] as a high — it was kind of like an average,” P&M managing director John Hart said. “There are a lot of positives about the economy and the health of the plastics industry.

“The auto industry is healthy again and we're seeing an

increase in inquiries for strong auto companies,” he said. “These had been unattractive in the recession and now we're seeing them come back into favor.

“In general, multiples are up,” Hart added. “And that might push sellers to consider deals.”

Plastics M&A veteran Thomas Blaige is even more bullish on the market, saying that his Chicago-based firm tracked 431 global plastics deals in 2014 and expects that number to break 500 in 2015 — an increase of more than 15 percent.

“The No. 1 thing we're seeing is that companies that had been coming out of the financial crisis with poor performance have improved,” Blaige said. “Seller psychology is back.”

2014 frenzy

Even if the deal totals showed modest growth, several plastics M&A pros were impressed with the level of action seen in the market during 2014.

“We've been incredibly busy — more than we've ever been,” said Terry Minnick, owner of Molding Business Systems in Florence, Mass. “This is the best M&A market since ‘05. We've got the perfect storm of processors in general doing better — so if they're looking to sell their business, their numbers will be good — and corporate profits are up, so there's a lot of demand from both financial and strategic buyers.”

Minnick's firm currently is working on 13 deals. If completed, he said that would be its busiest year ever.

“We usually do a half dozen,” he said.

Rick Weil, a managing director at Mesirow Financial Inc. in Chicago, said that a week hardly went by in 2014 without a big transaction being announced.

“There was so much M&A activity in 2014 it's been crazy,” Weil said in a telephone interview. “I counted 32 deals from January 2014 through the end of last year in rigid plastic packaging — not even flexible, just rigid plastic packaging. There's a confluence of fewer targets and lots of capital chasing them, whether it's private equity or strategic buyers.”

At Polymer Transaction Advisors Inc. in Newbury, Ohio, owner Bill Ridenor said his firm is working on at least five deals and is seeing plastics business pricing “at all-time historic highs — I'm seeing prices I'd never think we'd see.

“With stocks increasing in value, there's a lot of equity to put into deals,” he added. “Interest rates are at historic lows and conventional bank lending is cheaper than it's ever been.

Strong sectors

The auto rebound has served to lift injection molding in general in plastics M&A.

 “I'd say the one sector that has grown the most as far as interest level in the last year is automotive,” said David Evatz, managing director of investment banking for Stout Risius Ross Advisors LLC in Chicago. “Medical is certainly still in a lot of demand … and in packaging there's a lot of activity … it's generally a strong and active sector.”

Evatz added that in the current M&A cycle, the auto market could have several years of growth remaining.

“Injection molding remains strong,” said Deborah Douglas, founder of St. Louis-based Douglas Group. “Blow molding also is healthy because there are more applications than before. Mold makers are also popular, because companies now want to have a [mold making] location in the U.S.”

P&M's Hart added that a drop in the percentage held by packaging deals was partly tied to a similar drop in thermoforming and sheet deals — a decline that he said was the result of industry consolidation leaving fewer firms to be bought and sold in that sector.

Andrew Petryk, managing director and principal with Brown Gibbons Lang & Co. in Cleveland, said that his firm is seeing a lot of interest in specialty packaging, particularly companies that have innovative design as it relates to consumer products such as food, or that have ways to differentiate products in the eye of the consumer.

“Consumers want to have single servings,” he said. “They want to make sure the product is fresh. They want to be able to reseal the product and to see through the lid or the side of container to see the product.”

On the industrial side, Petryk said that medical-related plastics — consumables like syringes, fittings and valves — are hot, as are implantables, where technology continues to evolve. This area includes hip and knee replacements, as well as facial implantables.

Traditional injection molding firms also are proving to be resilient.

“It didn't used to be pleasant to be a molder in Indiana, Ohio and Illinois, but those areas are hot now,” Minnick said.

Mayer said that more specialized plastics firms also are attractive because of what he called “stickiness.”

“The more specialized a business, the more sticky it becomes,” he explained. “They've got customer relations that have been built over a long time. If they've made a part for someone for the last 10 to 15 years, there's a reason for that.”

At SRR, Evatz agreed that specialization has its merits.

“It really comes down to what niche are you playing in, what value add are you providing?” he said. “Are you a supplier providing some unique elements and you're only competing against a handful of companies or are you a supplier that could be competing against a hundred different companies?”

Who's buying?

Private equity firms continue to joust with strategic buyers from within the plastics industry. The percentage of deals involving a private equity buyer or seller declined slightly — from 68 percent to 65 percent — in the P&M tally, but buyers from that sector by no means are going away.

“Private equity still has a lot of interest in this market,” said Kevin Mayer, managing director with Western Reserve Partners in Cleveland. “But there's such supply/demand imbalance because there's so much demand for good companies.”

Weil said that private equity will remain strong as money from pensions, wealthy families and individual investors “needs to be put to work.” BGL's Petryk went so far as to say that potential buyers of plastics firms “are frustrated there's not more product to look at, and they're frustrated at the valuations they have to pay while sellers are still a bit reluctant to bring their businesses to market.

“I think [buyers' expectations] have to do with their expectation from a performance standpoint,” he explained. “They expect a strong 2015 and they want to benefit from improved EBITDA before they go to market.”

Strategic buyers aren't going away either — but they might be becoming more selective.

“The strategics are even more disciplined, so it really has to fit in their core business and be very complementary for them to look,” SRR's Evatz said. “We're not seeing a whole lot of expansion outside of core competency from strategics. It really does have to fit and be complimentary and synergistic at day one.”

In many cases, strategic buyers can out-bid those from private equity — according to several sources contacted for this story — but the increased presence of private equity results in driving prices up for plastics firms across the board.

Minnick added that interest from foreign firms in U.S. businesses is up. One recent deal his firm worked on drew interest from three different French buyers.

“They said the U.S. was a good place for their money,” he said.

Time to sell?

Blaige wears his heart on his sleeve when he says that 2015 “has to be year of the seller's market.

“On average, we're getting six to 12 offers for any given company,” he explained. “Three years ago that number would have been four to six. If you thought you were going to get nine times earnings for your company, you weren't going to sell in the recession when that number was down 50 percent. But a lot of those firms are back now.”

With some plastics business owners who opened their doors in the 1970s and even early 1980s approaching retirement age, more businesses could be reaching the market. But Douglas pointed out that many such owners — especially those of smaller firms with between $10 million and $50 million in annual sales — “don't sell because it's the smart time to sell, they sell because it's that time of their life.”

This especially might hold true, she said, for owners who struggled through the recession but now are seeing better results. More private owners also have reached out to Western Reserve since late summer.

Private owners “have seen these higher valuations,” Mayer said. “Some are retiring but couldn't sell during the recession.”

Some private equity owners also are looking to sell as they reach the end of typical five to seven year holding cycles.

“A wave of private equity portfolio companies — a lot were purchased in 2009, ‘10 and ‘11 — are starting to be sold,” Weil said. “If a company was purchased in ‘11 and it has performed well why wouldn't you sell now? The market is strong. There's going to be a lot of buyers for it.

“If a company sold for X in normal times it might now sell for X plus 10 percent or 20 percent. It's definitely a good market so maybe hold periods will come down.”

Petryk cautioned that although 2015 remains a seller's market, it could shift to a buyer's market if owners wait too long to place their businesses up for sale.

Multiplying factors

Those higher selling prices are the result of higher earnings multiples being paid. Multiples of 4 to 6 times earnings for a standard plastics processor seem to be increasing.

Specialty processors can exceed that 4 to 6 multiple, Ridenour said. But he added that he was surprised that a materials firm that did some specialty work recently sold for 9.4 times earnings.

“You wouldn't have seen that type of multiple last year,” he said.

A company that sold for a 4 multiple three years ago might command 4.5 to 5 today, according to Minnick, who added that the reasons for the increase are pretty clear.

“If you put a ‘for sale' sign in front of your house when it's not a good market, you might get two people look at it,” he said. “But in a good market, you'll get 25 people and you're likely to get a better price.”

If a 6 multiple is average, Mayer said a plastics firm in the top 25 percent might get a 7 multiple, while one in the top 10 percent might get an 8. Douglas added that although the range of multiples paid for plastics firms isn't increasing by leaps and bounds, it's still increasing. The 4 to 6 multiple range might be moving to 5 to 7, she explained.

Deals to remember

At P&M, Hart cited two deals that the firm worked on in the second half of 2014 as being exceptional. The first was French packaging maker PSB Industries in July acquiring plastic closure maker C+N Packaging Inc. of Wyandanch, N.Y. The deal strengthened PSB in fragrances, cosmetics and other consumer packaging.

In the second deal, blow molder Pretium Packaging LLC in December bought blow molder Tri-Delta Plastics of Hillsborough, N.J. The deal gives Pretium — which is owned by private equity firm Genstar Capital LLC — access to containers and closures for the spices and seasonings market.

Hart added that Genstar “has been aggressive on the acquisition front.” In September, Genstar-owned orthopedic implant maker Tecomet Inc. bought 3D Medical Manufacturing Inc., a maker of implants and specialty instruments in Riviera Beach, Fla.

Western Reserve worked with Myers Industries Inc. in June when it sold WEK Industries Inc. — an automotive blow molder — to Toledo Molding & Die Inc. for $19.5 million. Mayer said that WEK was a better fit for other buyers than it was for Akron, Ohio-based Myers, which was focusing on other markets.

Weil singled out British rigid packaging firm RPC Group plc, which made four deals in 2014. The firm bought British rival Maynard & Harris Group Ltd. for almost $170 million, but that proved to be only the warmup for its $497 million purchase of Iceland-based Promens Group AS and its $430 million buy of Chinese plastics firm Ace Corp. Holdings Ltd. RPC also made a smaller deal for injection molder Helioplast d.o.o. of Bosnia and Herzegovina.

Film and sheet leader Inteplast Group Ltd.'s $78.6 million acquisition of medical supplier Medegen Medical Products LLC was mentioned by Blaige as “a good example of cross-segment activity.” Plastic items made by Gallaway, Tenn.-based Medegen include patient utensils, nursing care kits, surgical kit components and disposable lab products such as petri dishes.

Oil wild card

One wild card in the 2015 plastics M&A market could be the price of oil, which has fallen in half globally since mid-2014 and already is starting to take plastic resin prices down with it. This in turn could affect plastics processors, since resin often is their single biggest component cost.

If lower resin prices improve the profitability of processing firms, that could result in higher price tags for firms that reach the market. But the degree and duration of this feedstock impact is still up in the air.

“If you already have escalator and de-escalator clauses in place for your resin buying, lower oil prices might not have much impact,” Hart said. “It might help short-term profitability, but I don't necessarily see lower resin costs driving significant change in the M&A market.”

Evatz said any benefits of lower oil prices also are likely to be limited to the commodity resins as opposed to engineering resins. Blaige added that lower resin costs might create lower part costs and make plastic more competitive vs. other materials.

“If paper prices are high and plastic prices drop, that helps plastic packaging,” he said. “It could drive conversion from metal or glass in other applications.”

Smaller inventories also can benefit processors when prices are dropping, added Petryk at BGL.

“If you have 30 days' worth of resin inventory, you're in far better position than somebody with 90 or 120 or more days of inventory on hand,” he said. “Because prices fell very quickly, people are still trying to figure out whether this is the new norm or if it's an anomaly.”

Investment pros agreed that although lower oil prices might not help plastic firms' transportation costs very much — since diesel, which has dropped less, is used more than standard gasoline — they also agreed that lower prices at the gas pump could put more money in consumers' pockets, driving demand for plastic products across a range of markets.

“Lower oil prices are good for the long-term growth of the plastics industry,” Minnick said.

Upward in ‘15

As a group, plastics M&A investment pros contacted for this story are optimistic about the market's chances in 2015. The rise of U.S. GDP growth was commonly cited as a reason for this enthusiasm. Unemployment in the U.S. also is down, which could drive consumer demand.

“2015 is shaping up to be a good year for plastics M&A,” Mayer said. “Financing is holding strong.”

Douglas added that the surge in M&A activity “should continue for the next six to 12 months, but probably not for the next two to three years.

“Unless there's some change in the overall dynamics out there,” Evatz said. “We see [M&A growth] continuing for 2015 and maybe 2016 and beyond.”