No plastics M&&A slowdown in first half of 2017

The lumbering colossus of the plastics M&A market continued its march in the first half of 2017.

Deal volume in the first half of 2017 totaled 164 transactions, up three vs. the first half of 2016, according to P&M Corporate Finance LLC of Southfield, Mich. The market remains on track to crack the 300-deal level for the 11th consecutive year.

Many factors affecting the pace of plastics mergers and acquisition activity remain positive, according to PMCF Managing Director John Hart.

"There's aggressive competition to win deals, from both strategic and financial buyers, and that's kept valuations at or near record highs," he said.

Private equity firms were involved in 42 percent of first-half deals tracked by PMCF. That's slightly higher than the 40 percent share they've had since 2015 and well above the 35 percent share the PE firms held from 2005-14.

Based on end markets, construction grew by six deals in the first half vs. the year-ago period. Transportation and food/beverage gained four deals each. Industrial and consumer markets each declined by five deals in the same comparison.

In terms of processing sectors, specialty processing increased by nine deals in the first half. Thermoforming and sheet each fell by four deals. For product segments, rigid packaging posted nine more deals vs. the first half of 2016, while custom molding slipped by four deals.

The portion of deals where both buyer and seller were based in the United States declined from 35 percent to 30 percent. The number of deals in which a private equity firm sold to another private equity firm grew from 7 percent to 11 percent in the comparison period.

That last trend, Hart said, is likely to continue, given the increased ownership by private equity in plastics who will seek exits in the next several years. For overall M&A across all markets, plastics remained strong in the first quarter, while overall volume was down around 20 percent.

"The expansion and strength of the bull market in plastics M&A has been going on for years and has continued into 2017," added Matt Miller, managing director of Bluewater Partners LLC in Grand Rapids, Mich. "We didn't see any dip in the first quarter this year. Volume was high, and there were a lot of bidding situations and high valuations."

Market activity, valuations and interest "all are at high levels," according to Rick Weil, managing director with Mesirow Financial in Chicago. Terry Minnick, owner of Molding Business Services in Florence, Mass., added that his firm recently closed on a deal involving a medical injection molder, and now has six other deals with letters of intent.

"Business continues to be good," Minnick said. "Things are really strong for the middle market of companies with $5 million to $50 million in sales.

"I'd have to say it's the strongest ever market for those companies," he added. "The U.S. is still a good place to do business, and that should continue for a while longer."

Capital markets are very strong, and private equity buyers were very aggressive in the first half, according to Andrew Petryk, managing director at Brown Gibbons Lang & Co. in Cleveland. "Strategics want to grow beyond GDP, and one way to do that is acquisitions. That's why consolidations will outnumber greenfields."

"Companies are looking for growth, and more buyers are looking for good people," added Miller at Bluewater. "They're hiring and retaining good people, whether it's in management, engineering or on the shop floor."

Strategic buyers also are following their customers to new geographies, he said, because of pressure for companies to get bigger and consolidate their supply base.

Polymer Transaction Advisors Inc. of Foxfire, N.C., currently has two transactions pending.

"Major corporations in the plastics industry are growing into new areas, and private equity firms are flush with cash," PTA President Bill Ridenour said. "We have one deal where three of the six interested buyers are private equity firms. A deal like that might have had one private equity bidder 20 years ago."

Overall private equity activity in M&A peaked in 2014, then started to fall over the last two years, according to Elizabeth Lim, a senior analyst with Mergermarket, an M&A news and analysis firm in New York.

However, Lim said, PE interest "does appear to be going back up a little bit, though it probably will not reach the highs from three years ago anytime soon."

"So for now it looks like corporates thinking about consolidations are the main players in plastics M&A this year," she added.

Earnings multiples that determine sale prices are up one turn since last year, with multiples for cyclical firms up two turns, according to Thomas Blaige, CEO and chairman of Blaige & Co. in Chicago.

PE firms "are trying to see how many deals they can get into shape," he said. "Supply and demand hasn't changed at all."

"Institutional investors now are getting involved," Blaige added. "They've seen all this private equity money and they want to jump in, but it takes them a while longer."

Blaige, who has 30 years of plastics market experience, raised a few eyebrows earlier this year when he spoke at an industry conference and said that the plastics M&A market had peaked.

"If you look at what defines a peak market, all the signs are there," he said recently. "There are high multiples for good companies and multiples for cyclical companies are starting to rise."

Other financial pros contacted for this story weren't so sure as to whether the market had peaked. "I don't think we're at a peak, but deals are getting more selective," said Petryk at BGL. "You're not seeing many deals with four-to-six multiples. It's more like six-to-eight, or more if it's a medical deal."

"It may be at a peak for big deals, but we're not seeing a drop in the number of people calling us," added Minnick at MBS. "It's easier to sell a more specialized company now."

Jason Bean of Douglas Group in St. Louis doesn't think plastics M&A has peaked. "We're seeing a lot more conversations than this time last year," he said. "The number of deals has been steady and valuations are about the same."

"It's hard to say if we're at a peak," added Weil at Mesirow. "Last summer, I might have said yes, but we've already closed a couple of good deals so far this year."

Plastics M&A activity continues to be strong, according to David Evatz, a managing director with Stout Risius Ross LLC in Chicago. Since mid-2015, the market has averaged 110 deals per quarter, a number that Evatz said was "above the historical average."

"We saw about the same in the first quarter, and that was after a big fourth quarter," he said. "The number of deals is still up, even if the quality of opportunities might vary. Valuations continue to be at or near all-time highs depending on segment by any metric."

Generally speaking, Lim added, plastics M&A "peaked in terms of deal value a couple of years ago, but in terms of deal count, it does look like we reached a peak at the end of 2016, with 2017 on track for that trend to continue."

Although the overall market is strong, one potential area of concern, according to Weil, is "a shortfall in the number of sellers."

"It almost seems like anyone who wanted to sell in the last couple years already has," he said "Some might want to stay in the family business, or some maybe had challenges in performance and are waiting to go to market.

"I think also a lot of business owners are getting so many calls from the private equity world and everywhere else that they can't separate them all," Weil added "You have to remember that a lot of these [owners] have had only one or maybe two bosses their entire life, so to them a new organization might seem bad just because it's different."

Lim at Mergermarket pointed out that there's "a general unpredictability in the economy at the moment, which has left dealmakers in various industries, not just plastics, cautious about large buys."

"There are questions about tax cuts and regulations, as well as overall geopolitical uncertainty, and that's left many bankers wanting to wait and see what will happen."

Rapid and sustained consolidation in plastics and packaging over the last several years "has naturally reduced the number of available targets for acquisition," according to Hart at P&M. In some cases, he said, record high valuations "are encouraging even the most reluctant sellers to consider a sale."

"Baby boomer entrepreneurs continue to enter retirement, and don't have a transition plan for their business to new leadership," Hart explained. "Private equity owners are shortening their holding periods and exiting investments to lock in substantial gains in equity."

As multiples have risen, expectations also have risen, added Phil Karig, managing director at Mathelin Bay Associates LLC in St. Louis. As a result, he said, owners "might be waiting for better offers, and if they sit on the sidelines, that reduces the number of sellers."

This trend might convince some owners to stay in the market two or three years longer, added Bean at Douglas. Stout's Evatz said that opportunities might seem scarce because demand is so significant.

"More traditional business owners see this as a good time to exit because of valuations," he added. "If you're in a cyclical business like automotive, that's approaching a plateau, you might consider selling as well."

At MBS, Minnick has seen "more and more foreign buyers with interest in the U.S."

"We're getting calls from Asian companies — from Japan, China, Southeast Asia — that need to be here to serve their customers," he said "They have to have North America covered. And from a logistics standpoint, it's becoming impractical to be a non-domestic processor. Now's the time to invest in the U.S. and North America."

Karig at Mathelin Bay added that his firm has seen a lot of interest from foreign companies, and that PE buyers "are all over the place."

"We're seeing foreign buyers, but that's more of an ongoing thing that's been increasing annually," Blaige said, adding that market interest from Latin America "has perked up lately."

From an end market perspective, plastics investors still can't go wrong with packaging and medical.

"The flexible packaging space is strong, and medical continues to drive a lot of business," said Bean at Douglas. Packaging "has been active and robust since 2010," Blaige added, while there's also action in "businesses nobody would buy a few years ago," like auto and construction.

"There have been a lot of studies and analysis that shows that packaging does good in a downturn," he said.

Bidders in the plastics space "have come primarily from the packaging industry, indicating that the sector is undergoing consolidation," Mergermarket's Lim said. While PTA has seen fewer sales in small- market niches, Ridenour said his firm has seen action in packaging, materials, injection molding, thermoset molding and rotational molding.

"Multiples differ by sector," he explained. "A custom injection molder might be toward the lower end, but still wouldn't be getting less than four. A good specialty masterbatch firm might get eight or nine."

Medical device companies "have been getting high multiples for the last five or six years," said Weil at Mesirow. "And companies in packaging have performed well year over year.'

Packaging and medical "always draw a lot of attention," Mathelin Bay's Karig said. "There's also interest in auto, sheet and industrial."

Geographically, Petryk said that BGL has seen quite a bit of activity in the Southeast U.S., which he described as "an underserved industrial hub."

The first half of 2017 has seen more than its share of big plastics M&A deals. The half "has been defined by numerous mega-deals reflecting buyers exiting at historically peak valuations," said Hart at P&M.

The largest number of mega-deals were in packaging, with non-packaging mega-deals in the raw materials and medical segments, he explained. Many of these transactions "reflected a mid-tier-sized private equity's buy and build strategy culminating in an exit to a larger private equity group," Hart said.

The list of notable first-half deals included:

• Silgan Holdings Inc. buying the specialty closures and dispensing business of WestRock Co. for $1 billion. The acquisition includes 13 global plants making triggers, pumps, sprayers and related products.

• Milliken & Co. acquiring plastics colorant maker Keystone Aniline Corp. P&M advised Keystone on that transaction.

• United Solutions Corp. buying the Rubbermaid consumer storage totes business. That unit has annual sales of about $70 million.

• Viking Plastics acquiring Kentucky Manufacturing and Technology in an injection molding deal. Stout advised KMT on that transaction.

• RPC Group plc buying Letica Corp. for $640 million. Letica makes rigid plastic packaging and food service products at 13 U.S. plants.

• Fisher Container Holdings LLC acquiring Packaging Products Corp. LLC in a flexible packaging deal. Mesirow worked with PPC on that transaction.

• Sonoco Products Co. buying thermoformer Peninsula Packaging Co. LLC for $230 million and Clear Lam Packaging Inc. in two all-cash deals. Peninsula has five manufacturing sites and annual sales of about $190 million. Clear Lam employs almost 400 at sites in Elk Grove Village, Ill., and Nanjing, China, producing flexible and forming films.

• Packaging firm Comar LLC buying injection molder and mold maker ProPlas Technologies. MBS worked with ProPlas on that Transaction.

• Oldcastle Architectural Inc. buying composite deck profile maker Advanced Environmental Recycling Technologies Inc. (AERT) for $117 million in an all-cash deal. AERT was an early innovator in using recycled polyethylene and wood fiber to extrude durable decking.

• Klockner Pentaplast Group merging with Linpac Group Ltd. in a deal that combines two global plastics packaging firms. Both firms are owned by Strategic Value Partners LLC, which does business as SVPGlobal. The merger could lead to an initial public offering.

• Loews Corp. buying Consolidated Container Co. for $1.2 billion. CCC had been owned by private equity giant Bain Capital Private Equity, which bought the firm for $800 million in 2012.

• Private equity firm Leonard Green & Partners LP acquiring Charter NEX Films Inc. for $1.5 billion. (See related story on page 13.) Charter NEX had been owned by private equity firm Mason Wells, which in 2012 combined Charter Films Inc. with NEX Performance Films Inc.

• Stone Canyon Industries' $2.3 billion acquisition of Mauser Group, a global supplier of rigid plastic and metal packaging products, through its holding company BWAY Corp.

• One51 plc buying Macro Plastics Inc., a maker of rigid plastic bulk bins, for $150 million. Macro operates three plants and expects to post sales of $95 million this year.

All financial pros interviewed for this story said they expect plastics M&A deal volume for full-year 2016 to match or exceed that of full-year 2017.

"The market still has above average growth potential," Blaige said. The only events that could hold 2017 deal volume down, Miller added, were "a big change in the economy or a geopolitical flare-up."

"We still expect robust M&A activity to continue through 2017 for quality plastics and packaging businesses," Hart said, citing several contributing factors, including:

• Sustained, record high valuations enticing sellers not to "miss the window."

• Strategic and financial buyer requirements to create inorganic growth, capture synergies, and put idle capital to work.

• The debt market's robust support for transactions with financing costs which remain historically low despite some recent increases in interest rates.

• Private equity's substantial levels of undeployed capital focused on industry consolidation.

But Hart added that, while most current economic conditions appear to be supportive, his firm remains "somewhat cautious" primarily because of the extended length of the current M&A cycle.