Experts: M&&A market near record metrics

The pace of plastics mergers and acquisitions continues to percolate like a gallon of high-strength Starbucks coffee laced with Red Bull.

The market recorded 355 deals in 2017, according to P&M Corporate Finance LLC of Southfield, Mich. That's a jump of 19 deals over 2016 and the third straight annual increase. It's also the highest number of deals posted since 2012.

Based on end market, the construction field saw its number of deals double from 19 in 2016 to 38 last year. The number of transportation deals also jumped from five to 14, while the electronics sector registered 11 deals in 2017 after seeing only two the previous year.

By process, the number of specialty deals surged almost 30 percent in 2017, while the number of injection molding deals was up almost 15 percent. And in plastics packaging, the number of deals involving bottle makers jumped almost 70 percent from year to year.

"Despite lower overall volume trends for global M&A in 2017, the plastics and packaging segment remained highly active this year," PMCF Managing Director John Hart said.

Key trends supporting increased deal volume, according to Hart, include heightened strategic buyer interest and the sustained presence of private equity investors.

"The plastics and packaging market continues to ​ attract strong interest from buyers interested in shaping the segment's continued consolidation," he said. "And the changing landscape is creating unique opportunities for large and mid-size players to enhance their positions via M&A."

From a market positioning perspective, Hart explained that strategic buyers "are turning to M&A to serve customers entering new geographies and markets, expand capabilities and strengthen their workforce." At the same, private equity investors are "flush with record amounts of cash and are pressured to grow … [and are] driving competition for industry consolidating deals."

Other financial pros contacted by Plastics News echoed Hart's comments about the strength of the plastics M&A market.

"There's more money sloshing around than there are companies out there to buy," said Phil Karig, managing director of Mathelin Bay Associates LLC in St. Louis. "Multiples are creeping up. We're not seeing any slowdown at all."

Elizabeth Lim, a senior analyst with Acuris (formerly Mergermarket), an M&A news and analysis firm in New York, pointed out that although overall M&A deal counts are down, deal value is up.

"If you look at the U.S., deals are being targeted based on chemicals/materials, construction and manufacturing," she said.

2017 was "a tremendous year" for plastics M&A, according to Terry Minnick, chairman of Molding Business Services in Florence, Mass. MBS had a record year in 2017, completing nine deals and reaching letters of intent on five others. And Minnick added that "there's still a fair amount of older owners out there, with good businesses and good finances, who are looking to sell."

Plastics M&A "is still relatively strong," said Deb Douglas, owner of Douglas Group in St. Louis. "We're seeing more of a focus to industrial channels, where buyers want to be in health care and automotive."

Douglas estimated that half to two-thirds of buyers that her firm is working with "have more focus" going into 2018. "They're afraid of what the economy will do long-term and afraid of a recession, so an area like food packaging is good long-term because it fits in with an aging baby boomer demographic," she said.

2017 "took things to a whole new level" in plastics M&A, according to Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. "We're seeing deals with multiples of six to eight — even 10-plus," he said. "Global asset returns in M&A are higher than they are in real estate."

The plastics M&A market "isn't slowing down and looks like it's getting its second legs again," said Rick Weil, managing director with Mesirow Financial in Chicago.

"Private equity and other buyers are coming under immense pressure, and they face tremendous competition to buy companies," he added. "And buyers are still jumping into packaging."

"The reality is that it's a very good market," said David Evatz, managing director with Stout Risius Ross in Chicago. "There continues to be strong M&A in the industry in general, and plastics remains strong on demand and on level of valuations."

"By any metric, the [plastics M&A] market is at or near all-time highs," he added. "Valuations are as good as they've ever been; they're at the top of the value addition pyramid."

The number of plastics and packaging deals involving private equity as a buyer decreased slightly in 2017, from 41 percent to 40 percent, according to PMCF. But private equity remains a major factor in almost every plastics transaction.

"Private equity doesn't want to give that money back," said Andrew Petryk, managing director with Brown Gibbons Lang & Co. in Cleveland. "But there's not enough quality deal flow, and strategic buyers have a lot of money on their balance sheets, so there's a lot of competition."

Pravin Mistry, global CEO with consulting firm PREA Ltd. in Manchester, England, said that his firm is seeing global competition, with private equity and venture capital on one side and strategic buyers such as manufacturing firms on the other.

"These acquisitions have been both horizontal and vertical and just ordinary bolt-ons for all parties," he said. "With the verticals, we are also seeing a lot of reverse integrations."

A recent report from Bluewater Partners LLC of Grand Rapids, Mich., added that "dry powder available to private equity groups and cash held by corporations remain at or near record levels" and that, overall, the economic variables that drive M&A "continue to be sustaining."

"There's overall private equity interest in all plastics sectors, processes and end markets," said Evatz at Stout. "Once [private equity] is in a segment, they don't gravitate too far out."

Private equity is driving deals in both flexible and rigid packaging, according to Weil at Mesirow.

"There's $600 billion of equity capital in the U.S. that's looking to get into an industry," he said. "When I started 17 years ago, private equity wanted returns of 20 to 25 percent. Now they're saying that returns of 10 to 12 percent are OK. They can look like heroes if they get 10 to 12 percent because competition is driving it."

But this high interest level also has created some challenges for both private equity and strategic buyers, according to Bill Ridenour, president of Polymer Transaction Advisors Inc. in Foxfire, N.C.

"The market for quality sellers in the plastics sector has been generally oversold due to the multiple acquisitions of numerous buyers," he said. "The net population of available potential sellers has shrunk due to the wave of acquisitions during the past seven years."

According to Douglas at Douglas Group, another factor affecting the availability of plastics assets is that owners are living longer.

"An owner who might have left at age 60 is now staying to 70," she said. "And the second generation might not want to be in the business."

Along those same lines, Petryk at BGL said that he's surprised that high valuations haven't led to more deal volume from owners who are in their late 50s or early 60s. "People have short memories about how dark the market got in 2008 and 2009," he said.

At PREA, Mistry said that companies looking into M&A "are still wanting a global presence but are trying to reduce their global footprint, and some are trying to bring manufacturing back home driven by cost and quality."

"In certain parts of the world where costs of manufacturing were initially low, we are seeing increasing wages, making certain products and raw materials not as cost-effective to purchase or produce," he said.

Minnick at MBS added that "if anything, private equity money is more active now than it was just a few years ago, and that's driving up prices for sellers."

Valuations always are a popular topic when plastics M&A is discussed, and 2017 was no different on that score. Companies selling for double-digit multiples of earnings used to be rare, and although they're still far from common, they're not as shocking as they once were.

"A double-digit [multiples] plastics deal used to be an outlier," said Karig at Mathelin Bay. "If people saw that, they'd think the buyer overpaid. But that's not the case anymore."

Although many plastics deals are still completed in the mid-to-high single-digit range of multiples, those levels have been inching up in recent years.

Double-digit multiples aren't surprising for specialty plastics firms, according to Douglas at Douglas Group. Minnick at MBS added that double-digit multiples are still rare for plastics firms with annual sales of between $10 million and $50 million, but they can be achieved if a company is in a specialty niche.

Plastics business owners who are thinking about selling "will look at you sideways if you don't say they might be able to get double-digit multiples," said Weil at Mesirow. Petryk said that BGL has seen double-digit multiples achieved in specialty packaging and health care deals and "strong single digits" for industrial firms.

"We're seeing [double-digit multiples] in medical deals and in some materials deals, but the business has to have good growth and diversification," Stout's Evatz said. Buyers "are willing to spend more money on high-value assets," added Lim at Acuris.

PMCF estimates that deal multiples have increased by around 0.5 to 1 times EBITDA over the past year.

"Pricing for plastics and packaging deals continues to be very favorable for sellers as deal multiples are at multiyear highs," Hart said. These strong valuations can be attributed to the availability and low cost of capital, a fair level of optimism in the economy and increased competition for a limited number of quality acquisition targets, he added.

At PTA, Ridenour said that most industry experts believe that M&A pricing is now at an all-time historic high because of the availability of cash, low interest rates and availability of debt even on mid-market transactions and "the unattractiveness of investments in low returning debt instruments."

Financial pros contacted for this story cited several premier plastics M&A deals that took place in the second half of 2017. Notable deals included:

• Private equity group Platinum Equity buying machinery giant Husky Injection Molding Systems from Berkshire Partners and OMERS Private Equity for $3.85 billion. Platinum Equity of Beverly Hills, Calif., was founded by billionaire Detroit Pistons owner Tom Gores. Berkshire and OMERS had purchased Husky for $2.1 billion in 2011 from Toronto-based private equity firm Onex Corp.

• Carlisle SynTec Inc. purchasing specialty polyurethanes firm Accella Performance Materials Inc. from Arsenal Partners LP for $670 million. Accella is headquartered in Maryland Heights, Mo., has sales of around $430 million and operates 10 plants and seven research sites in the U.S., Germany, and China.

• Berry Global Group's $475 million all-cash acquisition of Clopay's plastic film business from Griffon Corp. Clopay makes breathable films, elastic films and laminates at six plants in the U.S., Germany, Brazil and China.

• Crown Holdings buying diversified packaging and equipment supplier Signode Industrial Group from private equity firm Carlyle Group for $3.9 billion. Carlyle had bought Signode from Illinois Tool Works for $3.2 billion in 2014. Signode supplies transit packaging consumables and equipment. The Glenview, Ill.-based firm has 93 operations in 40 countries.

• Multi-Color Corp.'s 1.2 billion euro ($1.45 billion) acquisition of Constantia Labels GmbH from Constantia Flexibles Group GmbH. The cash-and-stock deal will intertwine the two companies. Cincinnati-based Multi-Color bills itself as one of the world's largest label companies with 45 plants, 5,500 employees and annual sales of more than $900 million. Constantia Labels brings with it 23 plants, 2,800 employees and annual sales of around $700 million.

Companies making multiple second-half acquisitions included ProAmpac (Clondalkin Flexible Packaging Orlando, the shopping bag business of AB Packaging Group, and PolyFirst Packaging), Graham Partners (Tray-Pak and Easy-Pak) and Comar (Shore Plastic Technologies and ProPlas Technologies).

MSD Partners' purchase of leading rigid plastic packaging business Ring Container Technologies was seen as noteworthy because billionaire investor Michael Dell of computer firm Dell Inc. is a backer of MSD. Ring is one of North America's largest blow molders, with annual sales of more than $300 million in high density polyethylene and PET bottles for food service, retail food and other markets.

"It was a bit surprising to see Michael Dell buy a blow molded container company," said Mesirow's Weil. "But that shows that people outside of the [plastics] industry see value in it."

Blaige also praised the overall strategy of packaging giant Novolex, including its second-half acquisition of Yakima, Wash.-based flexible packaging maker Shields Bag & Printing. Shields' portfolio includes blown film extrusion, printing, bag making and converting. The firm has annual sales of around $180 million.

It's the seventh deal in five years for Hartsville, S.C.-based Novolex, which now has annual sales of $2.5 billion. Novolex, formerly known as Hilex Poly, was itself acquired in 2016 by private equity firm Carlyle.

"Novolex and [CEO] Stan Bikulege really changed the competitive landscape with their deals," Blaige said. Weil added that Novolex was "a case study" of private equity involvement in packaging.

Looking ahead, market veterans see no indicators that the pace of plastics M&A will slow down in 2018.

"It's still a seller's market, and there continues to be strong interest in packaging and medical," said Karig at Mathelin Bay. Minnick at MBS added that although some buyers are concerned about the possibility of a market correction, the U.S. economy "still looks good and M&A continues to heat up."

"We don't see any sign of a peak, but these markets do work on cycles," said Douglas at Douglas Group. And although Blaige believes that the plastics M&A market "is on a seven- or eight-year uptick," he added that there's room for more consolidation.

At BGL, Petryk said the firm in 2018 is expecting "continued investment with significant growth opportunities for new customers and new platforms." Evatz added that Stout "isn't expecting a big boost in 2018, but it should be as good as 2016 and 2017, with most growth in packaging."

"There continues to be lots of demand for plastics businesses across value chains," he said.

PMCF "expects robust M&A activity to continue throughout 2018 for quality plastics and packaging businesses," according to Hart. "We believe the segment's stability through economic cycles, large and growing platforms seeking acquisitions, and increased focus from private equity will continue to create a positive outlook for plastics and packaging M&A throughout 2018," he added.

In its report, Bluewater said that "taken together, our outlook for M&A activity in 2018, is positive. … Retirement, concerns about the window closing and shifts in strategy continue to bring sellers to the table … [and] aside from geopolitical risks, the lack of available, high-quality targets is probably the greatest threat to another robust year."

The law of supply and demand "should greatly favor quality businesses as we head into 2018 as larger numbers of buyers with greater amounts of cash seek an increasingly small group of sellers," said Ridenour at PTA. "We believe that the already historically high multiples of earnings paid may increase another 10 to 15 percent."

Mistry at PREA said that plastics M&A could see more activity from composites and 3D printing in 2018 and that the market should stay strong overall. "Albeit aliens landing on our planet from another solar system, the M&A market will still continue regardless of the global changes in government and politicians," he said. "There will always be opportunities.

"Businesses will always be there. Politicians and respective parties will come and go as they do and will continue into 2018 regardless of the country and size of the business," Mistry said.

Optimism about 2018 plastics M&A also led Mistry to quote a one-hit wonder from 1986.

"As the song goes, the future's so bright, I gotta wear shades," he said.