LAKE LAS VEGAS, NEV. — Packaging has outperformed the field for mergers and acquisitions for an extended period of time, an Ernst & Young official said at the Plastics News Executive Forum.
Bernard Cormier said there's a lot of private equity money available, including from large pension funds, as investors seek higher returns what looks like a long-term environment of low interest rates.
“They view packaging as a lower risk, lower cyclicality,” said Cormier, vice president of transaction advisory services for E&Y Orenda Corporate Finance Inc. in Montreal.
People have to eat, of course. Packaging also grows at a higher rate than gross domestic product.
Some packaging companies are selling for 9 times EBITDA (earnings before interest, taxes, depreciation and amortization), Cormier said.
Credit markets have returned to pre-economic crisis levels, which also helps fuel M&A activity, Cormier said. Factories and equipment are tangible assets that can be more easily valued than other investments.
“There are a lot of lenders out there that are eager for deals,” he said at the Executive Forum.
Cormier listed several factors for success in packaging — with an eye to positioning a company for a sale.
He advised processors to try to lock in raw material prices. Yes, resin prices are going down now, leading to higher margins for processors, but Cormier said that won't last long as customers ask for price cuts. Several forum attendees said that is already happening.
“We see lots of our clients actually gambling with the purchase of raw materials,” he said.
Cormier said packaging companies need to constantly use less material, often through downgauging. That requires buying new equipment. He said many of E&Y's mid-sized clients don't upgrade machinery, and that erodes EBITDA.
“It has a severe impact on your pocket if you're an owner and you're looking to sell,” he added.
However, you have to make intelligent capital investments, to generate cash flow and work closely with customers to meet their needs, Cormier said.
“The customer drives the show. It changes constantly,” he said.