Plastics M&&A remains hot, valuations on the rise

Optimism usually abounds at the start of a new year, and 2017 is no exception where North American mergers and acquisitions pros are concerned. Most see plastics M&A activity in 2017 exceeding or at least matching 2016's deal volume.

“Organic growth is single-digit, just like GDP growth,” said Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. “To go beyond that, companies need to look at acquisitions. We're still seeing a lot of untapped capital. I think high multiples will be sustained in 2017.”

Several M&A pros said that the removal of uncertainty about the U.S. presidential election and the pro-business approach of president-elect Donald Trump might help M&A activity in 2017.

“There are still more buyers than sellers in the market,” said John Hart, managing director of P&M Corporate Finance in Southfield, Mich. “There's excess cash and pressure to grow, especially in private equity.”

Rick Weil, managing director at Mesirow Financial in Chicago, added that all major factors — interest rates, debt environments, public stock valuations, private equity dry powder and general economic conditions — “are signaling green lights.”

“We expect continued growth in

institutional allocations toward private equity, and plastics packaging will likely remain a favored industry from the perspective of private equity investors,” he added.

Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago, sees overall plastics M&A deal volume growing around 5 percent, with multiples in a range of 6 to 10 times earnings and possibly growing on the lower end.

2017 “could be a phenomenal year in the plastics and chemical markets,” said Ben Whiting, plastics team leader at KeyBanc Capital Markets in Cleveland. “We should see a more pro-business environment and there's a lot of capital out there.”

The plastics mergers and acquisitions market rebounded from a so-so performance in the first half of 2016 to notch a slight increase in deal volume for the year.

The market recorded 338 total plastics and packaging deals in 2016, according to P&M Corporate Finance. That's a gain of 10 — or 3 percent — vs. 2015.

“There was quite a difference from June and July on,” said P&M's John Hart. “Some activity that started in the first half closed in the second. Things were largely strong for the whole year.”

“It didn't seem like there was one certain thing that made 2016 a good year [for plastics M&A],” added Terry Minnick, owner of Molding Business Services in Florence, Mass. “Low interest rates helped, and we had relatively good economic conditions.

“We had a record year with nine transactions,” he added. “The market seems very robust to us.”

2016 “was a strong year,” said BGL's Andrew Petryk. “Valuations were strong and [earnings] multiples held at 2015 levels. We saw good activity from private equity and strategic buyers, and that should continue in 2017.”

Plastics M&A valuations “may have peaked, but should remain constant,” according to Bill Ridenour, president of Polymer Transaction Advisors Inc. in Foxfire, N.C. “The stock market is doing well, and people are taking profits there and investing back into equity.”

Plastics deal tracking at Stout Risius Ross Advisors LLC in Chicago found growth of almost 16 percent in 2016.

“Deal volume was up all year,” SRR managing director David Evatz said. “There was a good transaction environment in general. The cost of capital was relatively low, so a lot of people had the ability to finance transactions.”

The first half of 2016 might have been slower as part of a carryover from the second half of 2015, according to KeyBanc's Ben Whiting, but it soon recovered. “People [in the first half] weren't sure when to launch deals, but they got back on their feet,” he said. “Now, finance markets are very robust — they're as good as they've ever been.”

“We saw continued improvement in the financial performance of companies in 2016,” said Blaige & Co.'s Thomas Blaige. “That helps to find valuations that everyone agrees on.”

Among end markets tracked by P&M, industrial and consumer each showed solid gains in plastics M&A for 2016. The number of deals in each of those markets increased by 12. For consumer, that added up to a gain of 27 percent. In industrial, it accounted for a 10 percent gain.

Plastics M&A deals in the food and beverage end market went in the other direction for the year, falling by 14 deals, or 19 percent.

Based on plastics processing sectors, film showed a gain of 12 deals, or 20 percent, in 2016, according to P&M. The number of deals in resin, color and compounding declined by nine, or 17 percent.

In terms of plastics product segments, industrial deals grew by 18, or 36 percent, for the year, according to P&M. Rigid packaging deals didn't fare as well for the year, slipping by eight for a 15 percent decrease.

Packaging, however, remains a favorite target of plastics M&A. Even as the number of rigid packaging deals fell in 2016, the number of flexible packaging transactions bumped up by six for a 13 percent gain.

“Despite significant consolidation, the [plastics packaging] market remains highly fragmented, which will continue to drive deal-making,” said Weil at Mesirow.

The number of automotive plastics deals tracked by P&M grew by only one in 2016, a 3 percent bump.

“Auto is literally a tale of two cities,” said Whiting at KeyBanc. For assets that want to be in North America, you're seeing robust prices. But at the same time, the U.S. could be at or near the top of the market. It might not go to 20 million builds.”

There were 17.5 million vehicles sold in the U.S. in 2016, a new record.

Minnick had a slightly different take at MBS. “Some are saying that auto has plateaued or is heading into a downturn, but there are always economic cycles, and I think what we're seeing is just normal. We're still seeing an upward trend in automotive.”

Plastics deals involving consumer and capital goods could be up in 2017, driven by consumer spending, according to Ridenour.

Medical packaging “is always steady and growing,” SRR's Evatz said.

Phil Karig, managing director at Mathelin Bay Associates, agreed, saying that both packaging and medical “will continue to attract a disproportionate amount of interest, due to their better than average margins and less than average cyclicality.”

Markets for building products and construction “could come out of the trough” in 2017 because of increased infrastructure spending, Evatz added. KeyBanc's Whiting cited pharmaceuticals and personal care as markets that have “continued robust interest.”

Financial pros contacted for this story don't anticipate much impact in 2017 from the 0.25 percent interest rate hike passed by the Federal Reserve in late 2016. Even if similar hikes are enacted in 2017, the pace of M&A shouldn't slow down, they said. Rates remain at historically low levels.

“There's currently still an enormous pool of capital available for deals,” Karig said. “Most financial buyers such as private equity firms are not going to be dissuaded from pursuing acquisitions because of marginal increases in their cost of capital.”

Karig added that the upward movement of interest rates in 2017 “is expected to be gradual enough to allow buyers, strategic as well as financial, to plan without the fear of large interest rate increases that could introduce unanticipated volatility and uncertainty into their acquisition planning.”

At PTA, Ridenour said that interest rates could have an impact on M&A activity over time, but small individual rate hikes aren't enough to alter the market. Blaige added that higher rates only would impact plastics M&A if they led to inflation and then to higher raw material prices.

Rising interest rates may actually encourage deal-making this year, according to Weil from Mesirow Financial, as rate hikes “have the potential to limit growth and inflation, and drive companies to continue looking to M&A for growth.”

At MBS, Minnick has seen Asian buyers — particularly those from Japan — loom to buy U.S. businesses to support the auto market rather than open their own greenfield sites. He said that difficulty in finding skilled labor in the U.S. is a big reason for this change in strategy.

“Historically, Japanese buyers did greenfield to supply Tier 1 [auto] suppliers,” he said. “But in the last year, we've sold three businesses to Japanese buyers.

“They're having a hard time finding skilled people like machinists and tool and die guys. It could take them two to three years to find people for their staff, but buying a company gives them instant access to resources.”

Some financial pros contacted for this story said they had seen the same trend, or at least understood the buying-vs.-greenfield strategy. “Buying gives [foreign buyers] a jump start vs. greenfield,” said Petryk at BGL. “They also wouldn't have to worry about permits or about screening new employees. It's an easier road to acquire a company.”

At SRR, Evatz said that cross-border deals tracked by his firm were up 45 percent in 2016. “Getting a beachhead by acquiring an existing business is more attractive to some buyers,” he explained.

Several financial pros mentioned Japan's Teijin Ltd. acquiring Continental Structural Plastics of Auburn Hills, Mich., as an example of this type of cross-border deal. Weil said that with that acquisition, Teijin gains expertise in glass fiber- and carbon fiber-reinforced composites and thermosets to expand its penetration into automotive composite products in North America.

P&M's Hart cited several “marquee transactions” that took place in the second half of 2016. These included Evansville, Ind.-based Berry Plastics' $765 million acquisition of AEP Industries, a manufacturer of flexible plastic packaging films based in Montvale, N.J. Hart also listed Australian packaging giant Amcor's $280 million acquisition of Harstville, S.C.-based Sonoco's blow molding operations.

Weil at Mesirow also spotlighted the Berry-AEP deal, as well as Pritzker Group Private Capital — a Chicago private equity firm — acquiring packaging firm ProAmpac of Cincinnati and Washington-based private equity firm Carlye Group's acquisition of bag maker and recycler Novolex of Hartsville. S.C.

One other big-money deal of the second half of 2016 was Australian construction giant Boral Ltd. paying $1.86 billion for Headwaters Inc. of South Jordan, Utah. Headwaters sells a variety of plastic building materials under different brand names, including vinyl siding, cellular PVC trim and decking, composite wood shutters and polymer-composite roofing products in addition to stone and block products.