A seller's market in plastics M&&A

Some eager plastics investors had a hard time finding people who wanted to take their money in the first half of 2015.

As a result, global plastics M&A deal volume was down a bit in that six-month period — but financial pros said there's still a lot of interest in the market. Several market veterans contacted by Plastics News said that one of the reasons for the first-half dip was the lack of quality plastics assets for hungry buyers to buy.

The global plastic deal count fell from 176 in the first half of 2014 to 158 for the same period in 2015, according to data compiled by P&M Corporate Finance in Southfield, Mich. Even after that 10 percent drop, first-half deal volume was close to historical averages, said P&M managing director John Hart.

“This does go in cycles, and it's a seller's market for sure,” Hart said. “We're not about to say it's going to end tomorrow. The amount of capital out there is significant.”

“We're not seeing a slowdown in demand for quality targets for strategic and private equity buyers,” added David Evatz, managing director of investment banking for Stout Risius Ross Advisors LLC in Chicago.

Market veteran Thomas Blaige, CEO of Blaige & Co. in Chicago, said that the current upcycle has gone on longer than expected, but that could be the result of the deep decline seen in the recession years of 2007-08.

“There's pent-up demand to sell,” explained Terry Minnick, owner of Molding Business Systems in Florence, Mass. “Some [owners] might have wanted to before, but didn't. Well, now is the time.”

“It's absolutely a seller's market,” agreed Kevin Mayer, managing director with Western Reserve Partners in Cleveland. “Businesses in plastics and most other sectors are selling for one or two turns above historic average multiples.

“There's just so much private equity capital out there supplied by robust corporate balance sheets. We're talking about several trillion dollars and not as many assets for sale,” Mayer said.

KeyBanc Capital Markets of Cleveland also identified that the average level of equity contribution in all M&A deals increased from just over 37 percent in 2014 to more than 39 percent in the first quarter of 2015, according to plastics team director Ben Whiting. That increase, he said, is a sign of increased competition in plastics M&A.

“Lenders aren't requiring that,” Whiting explained. “But to win deals, companies have to do it.”

Multiples touching the sky?

As average selling price multiples have climbed from the four to six range to five to seven, could there be a point where private equity walks away from the plastics market — maybe out of concern that they couldn't sell those plastics firms again at a profit?

“Markets can get overheated, but I don't think that's happening in this business,” said Minnick at MBS. “There's a natural upper limit, but that's not to say individual deals can't go crazy.”

“Valuations are at attractive levels,” added Andrew Petryk, managing director and principal with Brown Gibbons Lang & Co. in Cleveland. “Depending on the end market, seven to nine times earnings could be a good range. If you have a medical-related business like valves or fittings used in a hospital or surgical environment, you could see 10 plus.”

One recent high-multiple deal was the Ontario Teachers' Pension Plan's May acquisition of plastic tanks maker Infiltrator Systems. OTPP paid $530 million for Infiltrator, which has annual sales of $190 million and earnings of between $35 million and $50 million — placing the selling price multiple well north of 10.

“You can look at any metric and see that multiples are at or near or above all-time highs,” said Evatz at SRR. “The most important factor is end market served. You might see automotive companies priced at four to six, with high-tech companies going higher.”

“It's eye-popping to see some of these multiples, but getting eight times for a company with $10 million in EBITDA isn't out of the question,” added Mayer.

At KeyBanc, Whiting doesn't expect multiples to get much higher, but he doesn't see them going much lower either. “The whole market should be strong for the next 6 to 12 months,” he said.

Not much interest in interest rates

The benchmark interest rate for the U.S. — a major financial pace-setter set by the Federal Reserve — has been at 0.25 percent since 2008. To put in context how shockingly low that number is, the rate between 1971 and 2015 — even factoring in seven years at 0.25 — has averaged almost 6 percent.

There's talk now that with a gradually improving economy, the Fed might finally start to move the rate up. If that happens, could it derail the plastics M&A bullet train?

“Interest rates going up won't have much of an impact on M&A,” said Hart at P&M. “It might have an impact on private equity pricing. But the fact that we're in a low [economic] growth time period has been good for M&A, because it allows investors to supplement organic growth.”

At Western Reserve, Mayer went so far as to say that the possibility of an interest rate increase “doesn't strike fear in me at all.”

“The market has understood that that there could be a gradual interest rate increase, maybe starting later this year,” he said. “That's already priced in.”

Whiting said an increase would affect the cost of borrowing and that could make some deals more expensive, but he wouldn't expect such an increase to slow down the pace of M&A.

“It's not going to go up 300 basis points,” Minnick said of the rate. “It might go up one quarter or one half percent, but that shouldn't affect the economy too much. I think the economy has more strength than that.”

The only financial pro contacted by Plastics News who was concerned about a rate hike was Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Newbury, Ohio.

“When we first looked at 2015, we were surprised that some key variables hadn't kicked in,” he said. “Low interest rates and the low cost of energy have helped keep us stable. If interest rates go up and then mortgage rates go up, it might be bad news.”

Europe express

The first half of 2015 also saw the continuation of the 2014 trend of European industry and financial buyers showing more interest in North American plastics businesses. Eriks NV of the Netherlands made a pair of deals, while European firms Grupo Antolin (Spain), Wendel Group (France), Haidlmair (Austria) and Lifco (Sweden) also made North American acquisitions.

“European strategic buyers are looking to the U.S., since outside of Germany, European growth is pretty meager,” said Petryk at BGL. “The U.S. is growing faster.” PTA's Ridenour agreed that the U.S. is seen as a better place to invest, adding that “no other active form of investment gives returns like M&A.”

“Some parties need to be here,” KeyBanc's Whiting said of North America. “They might be looking for growth or more stability.”

 Some money also has gone in the other direction, with U.S. companies like Quanex and 3i taking advantage of the strong U.S. dollar and picking up assets in Europe. P&M's Hart said that some of these deals are the result of companies “looking at their global footprint and following their customers.”

Market mix

Packaging, automotive and medical continue to draw a lot of interest in the plastics M&A field.

“Packaging has been consistent,” Blaige at Blaige & Co. said. “It's been busy and very active. Cyclicals like construction and transportation also are coming back.”

While interest in packaging has remained high, Hart said the number of rigid packaging deals could be decreasing, mainly because several consolidations have left fewer firms available to buy. Fewer assets also are available in the medical field, he added.

Automotive plastics firms might be approaching peak productivity as a result of historically high build numbers, according to Whiting. Evatz agreed that auto production might not increase as much as it has in recent years, but he added that the market “is still on the upswing.”

Evatz also listed building, lawn and garden and real estate as markets that “just now are starting to rebound.” He agreed with the assessment of the medical market, saying that there's “still high demand, but scarcity.”

Whiting identified medical, personal care and food ingredients as “hot segments” for 2015, largely because those fields are non-cyclical and have high barriers to entry.

Financial buyers — including private equity firms — played a bigger role in plastics M&A in the first half of 2015 vs. the year-ago period, accounting for more than 39 percent of total deals. Those firms had a market share of less than 31 percent in the first half of 2014.

The industrial end market saw the biggest decline in the first half, recording 22 fewer deals for a drop of almost 30 percent. The number of medical deals increased from 10 to 14 for a 40 percent gain.

That industrial drop played a role in the number of deals involving custom molding falling from 58 to 37, a 36 percent slide. The rigid packaging product segment surged from 13 deals in first-half 2014 to 22 this year for an increase of almost 70 percent.

Among processing sectors, the resin, color and compounding field saw its first-half deal volume slip 30 percent, from 37 to 26.

Deal me in

Large plastics M&A deals tracked by Plastics News in the first half of 2015 included:

• Mohawk Industries $1.2 billion purchase of PVC tile maker IVC.

• A. Schulman Inc.'s $800 million acquisition of thermoplastics and thermoset compounder Citadel Plastics Group. KeyBanc represented Citadel in that deal.

• OTPP buying Infiltrator from Graham Partners for $530 million.

• Magna International selling its auto interiors business to Grupo Antolin for $525 million.

P&M's Hart also mentioned MeadWestvaco's $11.6 billion packaging megamerger with Rock-Tenn Inc. Although that deal wasn't plastics-focused, MeadWestvaco has a large plastics packaging business.

In late 2014, P&M represented blow molder Pretium Packaging LLC in its deal for Tri-Delta plastics, a maker of containers and closures based in Hillsborough, N.J.

Tense in the future?

With the second half of 2015 on the horizon, financial pros are confident that the year can finish strong.

“Plastics continue to be the darling of the private equity community,” said Petryk at BGL. “There are a handful of quality consolidators out there. For the most part, it's a steady industry with good growth opportunities and not as much capacity as there once was.

“2015 should be a good year, with the costs of material and oil down,” he added, pointing out that BGL currently is working on four plastics deals — twice as many as it typically handles at one time.

As a sign of market strength, Minnick cited his firm's recent marketing of a U.S. injection molder with annual sales of $5 million. That firm drew interest from 70 potential buyers, he said, 15 of whom visited the molder and 11 that ended up bidding on it.

“I don't see things slowing down until maybe after the [U.S. presidential] election in 2016, unless something big like a Greek default happens,” he said.

Ridenour described how all-time high acquisition prices “are propelling sellers into the marketplace, and that's creating competition, which is in turn keeping prices high.”

Whiting said he's surprised that KeyBanc hasn't seen more family-owned plastics businesses looking to sell, but he pointed out that some of them “will naturally get to that point.”

At P&M, Hart said that potential sellers should review their firms before entering the market.

“This is a good time for owners to sell,” he said. “The market has to be in a good spot, but your company needs to be in good spot as well. So you might need to make some changes.”