M&&A market 'might be a little fished out'

The number of global plastics mergers and acquisitions dipped in the first half of 2016, but the market remained on pace to record more than 300 deals for the sixth consecutive year.

“Strategic buyer deals are down, but the number of those involving financial buyers is about the same,” said John Hart, managing director with P&M Corporate Finance in Southfield, Mich. “Private equity remains strong, and there's the same level of interest in activity.”

P&M tracked 155 plastics and packaging deals in the first half of the year, down almost 11 percent from the 174 recorded in the same period last year. “There's been increased interest in injection molding in the last 18 months,” Hart explained. “And there's still a lot of interest in packaging, but there's a limited pool of sellers there.

“Some consolidation [in packaging] has occurred already. There are more injection molders who want to sell.”

Among end markets, food and beverage saw the biggest first-half decline, sliding from 43 deals to 26 (down 40 percent). The number of deals in the consumer end market rose from 20 to 24.

Based on sectors, the only category tracked by P&M that didn't record a first-half loss was specialty, which remained flat at 33 deals. The number of resin, color and compounding deals decreased from 30 to 21 (down 30 percent).

In product segments, the number of first-half consumer deals ticked up from 7 to 10. But the number of rigid packaging deals tumbled from 24 to 16 (down 33 percent).

Plastics News recently checked in with several M&A experts to get their reactions to first-half activity, as well as their expectations for the second half of 2016.

Competitive landscape

First-half plastics M&A has played out against a backdrop of U.S. GDP growth of around 2 percent, and with the Dow Jones Industrial Average up almost 3 percent through June 30. This would appear to be moderate economic growth at best, but it's better than results in some other parts of the world.

Prices for West Texas Intermediate Oil began the year around $40 per barrel, then fell below $35 but were near $48 as the first half ended — a six-month increase of about 20 percent. North American resin prices haven't seen as much volatility, which has been good for plastics processors in the region.

The U.S. housing market has been solid, with May construction at an annual rate of 1.16 million units — up more than 9 percent vs. the same month in 2015. Through May, North American auto production was up almost 4 percent vs. the year-ago period to almost 7.7 million vehicles. That's slightly ahead of the 3.3 percent growth rate that the category showed for full-year 2015.

The first-half plastics M&A market has been particularly busy for Molding Business Services in Florence, Mass. “The market continues to be very hot,” owner Terry Minnick said. ”We've closed five transactions in the first half, have three more deals under letters of intent and have eight full-broker deals on our plate.”

David Evatz, managing director at Stout Risius Ross Advisors LLC in Chicago, agreed that deal activity has been picking up in recent weeks. “A lot of factors are combining to create a strong market,” he said. “We've got good capital markets and active strategic and financial buyers.”

“We're seeing new deals every few days,” said Rick Weil, managing director at Mesirow Financial in Chicago. “The market continues to be very strong and active and there continues to be money chasing deals.

“Anyone remotely thinking about selling their company, is,” he added. “This is the strongest I've seen it in the 16 years that I've been in this market.”

Others were optimistic but a little cautious. “The first quarter was slow overall, but that might shift in the third and fourth quarter,” said Ben Whiting, plastics team leader with KeyBanc Capital Markets in Cleveland. “Industrial end markets might be close to a cyclical peak.”

“There are a lot of buyers out there, but for the first time in a long time, it feels like plastics M&A might be a little fished out,” added Bill Ridenour, president of Polymer Transaction Advisors in Foxfire, N.C. “There aren't as many categories available as there have been in the past.”

Top markets attract deals

The packaging, medical and automotive markets continue to be areas of emphasis for plastics M&A.

“Packaging is more fragmented, but it tends to be insulated from some of the ups and downs of the market,” said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago.

“We've seen a lot of growth in packaging,” added Evatz at SRR. “Plastic is still replacing other materials there. Consolidation is continuing — but it's a large segment.”

Several financial pros cited Stone Canyon Industries' $2.4 billion purchase of plastic and metal container maker Bway Corp. of Atlanta as a standout first-half packaging deal. Bway was sold in June by private equity firm Platinum Equity LLC to Stone Canyon, which owns a broad portfolio ranging from railroad equipment to women's apparel.

Platinum had acquired Bway for $1.24 billion in 2012 from Madison Dearborn Partners LLC and bolted on Ropak Packaging, a maker of rigid plastic shipping containers, within a matter of months in a $265 million transaction. Bway makes a variety of plastic containers for the industrial, bulk food and retail markets. They include pails, buckets, drums and dairy containers.

Blaige also cited Novolex acquiring Heritage Bag Co. as an example of a firm trying to consolidate in both plastics and paper packaging. Heritage operates six plants, making plastic trash bags, can liners and food bags for institutional and commercial customers. The company's product portfolio also includes items such as medical waste bags and ice bucket liners.

The medical plastics market remains strong, generating a lot of interest because of its non-cyclical results, according to Whiting at KeyBanc. The medical sector “has seen less of a pullback than traditional industrial businesses,” he said.

PTA's Ridenour added that the medical sector “isn't under a lot of price pressure,” since some products “are propped up by government programs.” He cited personal care and pharmaceuticals as “top targets” in the medical space.

“If anything, medical has picked up and is continuing to grow,” said Weil at Mesirow. “Demographics are working in [medical's] favor.” Medical companies also “are trading at higher levels vs. other segments,” according to Evatz.

Medical injection molder Phillips-Medisize Corp. of Hudson, Wis., was cited as an active player in the field, making two deals in June. On June 1, the firm bought European drug delivery firm Medicom Innovation Partner A/S. Officials said that the addition of Medicom will expand Phillips-Medisize's end-to-end injectable and inhalation device and services offerings and offer a chance to tap into Medicom's technology accelerator programs.

Then on June 30, Phillips-Medisize said that it was extending its manufacturing capabilities to the Northeastern U.S. by acquiring Injectronics Inc., which has two Massachusetts facilities. Clinton, Mass.-based Injectronics provides contract engineering and manufacturing for consumable diagnostics and medical device customers.

Automotive plastics firms continue to draw interest, even though there's a growing feeling that the market may have peaked as far as production.

“Auto is at the top of the curve and might see some pullback,” Whiting said. “Cars are manufactured to last longer because they're being built of better materials — including plastics.”

“Interest in automotive injection molders remains high in the U.S., even as some work shifts to Mexico,” Evatz said. “Some North American injection molders want to buy Mexican operations,” he added.

Petryk at BGL contends that the auto market might have some staying power. “There's still a lot of interest there,” he said. “Those [production] numbers might be peaking, but they're not expected to go down that much.”

The plastics machinery market drew some first-half attention in January when state-owned China National Chemical Corp. — known as ChemChina — paid just over $1 billion for global giant KraussMaffei Group. ChemChina officials called KM “the Rolls-Royce” of the polymer machinery industry.

Toronto-based private equity firm Onex Corp. had owned KM since 2012. ChemChina said the purchase is the single largest investment that a Chinese company has ever made in Germany. ChemChina's existing machinery subsidiary — China National Chemical Equipment Co. Ltd. — and KM have complementary product portfolios and markets.

In it for the money

Bank lending and financing seems to be readily available to firms with good credit. Low interest rates also continue to encourage buyers to take advantage of M&A opportunities.

“There's been no change in financing,” Weil said. “We're seeing some very attractive debt packages.”

Blaige agreed that financing “continues to get more favorable,” but he pointed out that the broader economic market “is in the seventh year of the seventh cycle. It makes you wonder when the other shoe is going to drop.”

Petryk said he's already seeing some signs of banks behaving as if the current up cycle may be ending. “We've seen some banks becoming less aggressive,” he said. “They're more focused on [borrowers'] criteria and in some cases are pulling back on available credit.

“Banks are looking at where we are in the current cycle,” Petryk added. “We're six to seven years in now, and they're starting to build in some conservatism, because they expect it to be down at some point.”

Now how much would you pay?

One of the most reliable ways to increase the heart rate of an M&A pro is to ask him or her about earnings multiples that buyers are paying.

P&M's John Hart is no exception. “Sellers' expectations have gone up,” he said. “They see the hype of a multiple without the full story. A small company isn't going to get the same multiple that a billion dollar company will.

“For a lot of deals, multiples in the first half were flat vs. last year, with not much change,” Hart added.

The 4-to-6-times EBITDA range has been relatively standard for middle-market plastics firms, with specialty businesses and larger firms commanding higher prices. But even that 4 to 6 level is being tested in the current market.

“It used to be if you told a buyer you could get then 4-6x they were happy with that,” said Weil at Mesirow. “Now you tell some of these guys 6x and you get laughed out the door. They want 7x or 8-10x for a mid-market deal. Those aren't always realistic, but I think we're at historic highs for the mid-market.”

Petryk and Whiting each said they don't see multiples moving much in either direction in the second half, although Whiting said there's a chance that multiples paid for automotive plastics firms could decline if that market reaches a peak.

“We're seeing some specialty deals at 8-9x, and a big injection molder could get 7x,” Ridenour said. “The demand for good companies is putting pressure on prices to move even higher.”

Companies with above average growth and above average margins “continue to sell at a premium of one to two turns above the prevailing market multiple,” said Kevin Mayer, managing director at Western Reserve Partners in Cleveland.

Higher multiples “primarily are resulting from a huge supply and demand imbalance in the M&A market, in terms of buyers with ample amounts of cash vs. companies that are truly actionable to be sold,” he added.

“We look at multiples on a case by case basis,” Blaige explained. “There always will be a size premium, but an average plastics processing company with $25 million to $50 million in annual sales isn't going to get 8-10x unless it's high-tech. A $25 million company typically can get anywhere from 4-5x to 6-7x.”

Private equity's influence

As in many investment areas, the influx of private equity money has had a big impact on plastics M&A in recent years.

The amount of total plastics and packaging transactions completed by financial buyers nearly reached 45 percent through the first half of 2016, up from approximately 40 percent in the first half of 2015, according to Hart at P&M. This increased activity “reflects a strong appetite for financial buyers to continue driving consolidation, particularly in the injection molding segment,” he added.

“One of the big drivers is the private equity money that is pouring into the small and midsize deal market,” said Minnick at MBS. “Private equity has always been a buyer of the bigger plastic processors but they are now willing to looking at smaller deals and even at very small deals if they are bolt-on opportunities to an existing platform.”

Out of the first 20 deals that MBS did from 1999-2007, only one was sold to a PE company. But PE firms have bought four of the five companies the firm has sold so far in 2016.

“Private equity is in a good place right now, but sometimes to beat out a strategic buyer, they still need to pay a big price,” Blaige said.

Still sweet in ‘16

What does the rest of 2016 hold for plastics M&A?

“We should make it through election season and be solid for the rest of the year,” said Whiting at KeyBanc. “I don't see any slowdown.”

“We're enthusiastic for 2016 and 2017,” added Petryk at BGL. “But we're hearing from some potential sellers ‘If I sold my company today what would I do with the money?' They're saying that because of low stock market returns.”

Mesirow's Weil added that high prices being paid for plastics firms “are hard for sellers to resist.

“Even if you're wrapped up in your company, it might be easier to decide to sell because valuations are so strong,” he said.

Although plastics M&A interest is high, Hart said the 2016 global deals total could end up falling short of the 2015 mark for several reasons, including a more limited supply of quality targets for acquisition as consolidation continues and more caution in debt markets.

“We continue to see strong buyer interest in well-positioned companies with exposure to attractive end markets,” he said.

Minnick is a plastics veteran of more than 40 years. His MBS firm just completed the biggest deal in its 18-year history, representing Meadville, Pa.-based injection molder Tech Molded Plastics in its sale to injection molder Prism Plastics Inc. of Chesterfield, Mich.

As a result, Minnick is pretty straightforward in his assessment of the current plastics M&A market.

“There has never been a better time to sell a plastics processing business,” he said.