The plastics M&&A market remains strong

Plastics mergers and acquisitions activity remained strong in the first half of 2018, with private equity investments continuing to play a larger role in the market.

P&M Corporate Finance LLC tracked 172 global plastics and packaging deals in the first half, down by seven deals — about 4 percent — from the first half of 2017. But that total still has the market on pace to top the number of deals recorded in three of the last five years.

The total deal count "is consistent with sustained levels and indicates an extension of the current M&A environment," PMCF Managing Director John Hart said. He added that key trends supporting deal volume include the desire of industry players to acquire new capabilities, expand their product portfolios, access new customers and expand their geographic reach.

Ongoing consolidation in specific market segments is also playing a role in plastics M&A, Hart said.

Within those totals, the influence of private equity is growing. Private equity was involved in 35 percent ​ of plastics M&A deals on average from 2006 to 2015, according to data from Southfield, Mich.-based PMCF, but that share has grown to 42 percent since 2016. And the PE share was even higher in the first half of 2018, when those firms had a hand in 49 percent of plastics M&A transactions.

Plastics News recently checked in with several financial pros to survey the plastics M&A landscape of the first half of 2018.

U.S. tax reform has lowered corporate tax rates for many companies in 2018. Some financial pros said it was too soon to measure any impact from the changes. But Bill Ridenour, president of Polymer Transaction Advisors Inc. in Foxfire, N.C., said he's already seen an impact.

"What's happened is that buyers have more money to spend because their tax rates are lower," he said. "A company that had been paying a 39 percent tax rate might now be paying only 20 percent. And higher earnings can lead to higher selling prices."

Ridenour added that his firm has been asked to more evaluations of possible sales as a result.

"It's too early to be definite, but in theory a lower tax rate would mean that companies have more funding available for dividends, hiring, [research and development] and M&A," said Elizabeth Lim, a senior analyst with the Acuris M&A news and analysis firm in New York.

Terry Minnick, chairman of Molding Business Services in Florence, Mass., said that the lower tax rates "could be a double-edged sword" for plastics M&A.

"We had a client this year who was about to sell and looking to retire, but the lower tax rate made him look at his business again," Minnick said. "He didn't back out of the deal, but the lower rate made him think about it."

The U.S. recently launched tariffs on many imported products, leading other countries to take similar action against U.S.-made products and to raise concerns about a possible global trade war. Many plastics products have already been included among tariff targets.

"In pure-play plastics, tariffs might not have a direct impact," said Andrew Petryk, managing director with Brown Gibbons Lang & Co. in Cleveland. "But a lot of plastics go into products with metal content, and metal tariffs would make those products less competitive."

Although there remains a lot of uncertainty about if or how tariffs will be enforced, Lim at Acuris said that uncertainty might make it difficult for buyers or sellers in plastics M&A to make accurate evaluations or to make bids.

Rick Weil, managing director with Mesirow Financial in Chicago, said his firm was recently contacted by a Canadian firm that was interested in making an acquisition in the U.S., where they did a lot of business, because of concerns about the impact of tariffs.

Ridenour at PTA added that the tariffs are in their early stages and although the U.S. "has to take a tough tone initially, no one wants a tariff war."

The global image of plastics has taken a bit of a hit in the first half, as concerns about the environmental impact of plastics in the oceans and single-use plastics have grown louder. But financial pros have mixed thoughts about what impact this could have on plastics M&A.

"There's some concern about plastic bans and their impact," said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. "There could be a potential cloud effect on the market."

"There will be a more critical eye on products floating in the ocean and the effect that those images have," added Petryk at BGL. "The question becomes what's an alternative product? We might see more biodegradables."

Lim at Acuris said that she's seen "some concern about what plastic is made of … there's a move to the renewable industry … so we'll have to see how plastics evolves to that trend."

But as in many areas of social concern, it can take a while before markets are impacted.

"This topic gets attention," said Phil Karig, managing director of Mathelin Bay Associates LLC in St. Louis. "And in a different market, you've got younger people interested in food without chemicals. But then you look at plastics and you see that a category like Lunchables for adults is still growing 15-20 percent."

Financial pros agree that earnings multiples paid for plastics firms are at or near historic levels. Multiple in the high single digits aren't uncommon anymore.

At Mesirow, Weil said the firm has handled six rigid and flexible deals of varying sizes in the last 18 months, with five of the six drawing multiples of eight times earnings or higher.

MBS tends to work with mid-sized or smaller firms, but Minnick said even those companies are going for multiples in the five to eight range or higher for firms in medical, silicone or other niche end markets.

Karig added that multiples of eight or nine or higher "are pretty common" for some packaging and medical firms.

At PMCF, Hart said that the strong valuations of the first half can be chalked up to the availability and low cost of capital, a positive outlook on the broader economy and the continued supply demand imbalance that exists between buyers and sellers.

"The range has expanded," Blaige said of earnings multiples. The top of the range is as high as it's been. You might see some movement at the bottom of the range, but not much on top."

Petryk added that for a firm to see a multiple of eight or nine, "you still need something special — a commodity shoot and ship molder isn't going to get eight to nine times."

"There's still high confidence, but my gut reaction is that valuations won't push higher than they are today. These levels could be sustained, but I don't see them going up much more."

There has been some movement in individual markets, including packaging.

"The mix changed a bit in the first half," said David Evatz, managing director with Stout Risius Ross LLC in Chicago. "The domestic market is up, but cross-border deals were down and deals involving strategic buyers were a little bit down.

"There were fewer corporate carve-outs, and deals involving private owners were up," he added. "Packaging was up meaningfully so far this year, particularly flexible transactions, but industrial and auto deals were down."

Blaige said that packaging "is still at the top of the wave" and that some automotive deals still are being done. "Cyclicals hadn't been attractive to buyers before, but now they are," he added. "That's a bit surprising."

Hart at PMCF said that plastic packaging sectors continue to experience steady growth and that rising retail and food service sales "are supported by high consumer engagement and confidence."

The geyser of private equity money erupting in plastics M&A doesn't look like it will run dry anytime soon.

"Private equity and financial buyers are hearing that plastics is a good business to be in," Minnick said. "They can put a few companies together and make things happen."

He added that only one of the first 10 deals his firm was involved in had a financial buyer, while today eight of 10 do.

"So much is driven by private equity," said Weil. "They'll buy a platform or build big platforms and sell to other private equity firms."

PE firms "still are doing rollups and bolt-ons. … That's their strategic direction," Karig added.

Plastics are still a good investment for PE firms, according to Evatz.

"Plastics are still replacing metal in new product applications," he said. "The products that are most attractive are in areas like multilayer flexible packaging or complex components. These aren't commodity-type products; they're more highly engineered."

In an overall assessment of private equity, Blaige said that plastics "has become an institutional segment" for many PE firms.

"There's a lot more data [on plastics companies] now," he added. "A lot of private equity firms have planted a stake in plastics."

The hot streak for plastics M&A is already several years in the running, but financial pros expect to see more of the same in the second half of 2018.

"There are a lot of good fundamentals saying that we could have an even longer [up] cycle, but some of that depends on geopolitical issues," said Hart at PMCF. Overall, his firm expects plastics and packaging M&A activity to remain strong through the balance of 2018 and at least through the first half of 2019.

Minnick at MBS pointed out that factors remaining in place for the second half include a good U.S. economy, available financing, private equity interest and an aging owner population among plastics firms.

BGL's Petryk said that activity should continue, but market watchers need to keep an eye on "so much on the world stage," including "very delicate situations" in North and South Korea, China and Russia and with tariffs.

"Some deals might not get done if interest rates go really high or if the economy slows down," said Karig. "But overall I don't see anything stopping the pace of M&A."

Among end markets, the number of deals involving consumer products increased by 11 (58 percent) in the first half vs. the year-ago period. The number of construction end market deals tumbled by 14 (64 percent).

By processing sector, sheet/thermoforming produced six more deals (46 percent) in the same comparison, while specialty deals fell by 14 (30 percent) and film deals dipped by eight (20 percent).

Viewed by product segment, the number of resin deals grew by six (30 percent), but building products deals were down by 12 (60 percent) and custom molding yielded 11 fewer deals (33 percent).

In another noteworthy change, foreign firms were involved in only 13 percent of U.S. plastics deals in the first half of 2018 after taking part in 17 percent in the same period last year.