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.
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