Following a record year for plastics M&As with wary eye on future

After several years of strong growth, concerns about the economy could slow down plastics mergers and acquisitions activity in the second half of 2022.

P&M Corporate Finance of Southfield, Mich., tracked 197 plastics and packaging deals in the first half of 2022. That's down 20 — about 9 percent — from the first half of 2021, but still more than in any half from 2017-20.

In spite of that downturn, the number of deals in the construction end market jumped 46 percent (from 13 to 19), while the number of industrial deals increased 21 percent (from 77 to 93).

By manufacturing sector, specialty deals — including packaging machinery, rotational molding and pipe extrusion — increased 40 percent, from 48 to 67. Sheet and thermoforming deals also grew 42 percent, from 12 to 17.

By product segment, rigid packaging deals were up more than 90 percent, from 15 to 29. Building products deals also jumped 50 percent, from 14 to 21.

Economic challenges exist in the form of high inflation and rising interest rates. Inflation for the 12 month period ending in May in the U.S. was at 8.6 percent, the highest rate recorded since December 1981. The federal funds interest rate began the year at 0.25 percent but had risen to 1.75 percent by June 15. The Federal Reserve on that date approved a 0.75 percent hike, the largest since 1994.

The rate now is the highest it's been since early 2020, when the COVID-19 pandemic led officials to reduce the rate to boost the economy. The Fed has been increasing the rates in an effort to tame inflation.

Low U.S. unemployment rates also have made it difficult for plastics processors and many other firms to find enough workers. The unemployment rate for May was at 3.6 percent, almost exactly where it was in January 2020, right before the pandemic began. Unemployment peaked at almost 15 percent in April 2020, but the economy recovered quickly, lowering the rate to less than 7 percent by the end of 2020 and just under 4 percent by the end of 2021.

High fuel and energy prices have affected the economy as well. U.S. gasoline prices were above $5 per gallon in mid-June and were at $4.88 on June 28 — up almost 58 percent over that date in 2021. WTI crude oil prices closed at $109.60 per barrel on June 27, up 43 percent since the start of the year. U.S. natural gas prices were at $6.50 per million btus on June 27, up 70 percent since the start of the year.

On Wall Street, the Dow Jones Industrial Average was near 31,700 on June 28, down about 13 percent from the start of the year. The broader S&P 500 was at 3,900 on that date, down almost 19 percent in the same comparison. U.S. GDP declined 1.4 percent in the first quarter and is projected to grow 2.3 percent in the second quarter. By comparison, GDP grew 6.9 percent in the fourth quarter of 2021 and 5.7 percent for the full year.

2021 "was an absolute record year for plastics and packaging M&A," PMCF Managing Director John Hart said. "We thought 2022 would level off a bit, but it stayed elevated in the first quarter. Then in the second quarter, we've seen some decline in foreign deals, but it's still strong.

"There's a lot of concern on the horizon, because of the impact of inflation and interest rates and the stock market, but as of now, we haven't seen a pullback," he said.

"So far, we're seeing activity remain strong and consistent with the last quarter of last year," added Matt Miller, managing director of BlueWater Partners LLC in Grand Rapids, Mich. "But more headwinds are gathering."

Plastics News recently checked in with Hart and other financial experts to measure their concern and their views on other trends.

Big numbers and frequent buyers filled the plastics M&A market in the first half of 2022.

The most direct way that these economic factors could affect plastics M&A is by increasing the cost of financing needed to complete some deals. Higher interest rates would increase these costs, potentially reducing earnings multiples and sale prices.

First-half deal volume started well, carrying over from 2021, but there are signs of a possible slowdown, according to Matt Yohe of investment firm MPE Partners in Cleveland.

Hart pointed out that even though interest rates are higher in recent months, they're still low by historical standards.

"We need to see more interest rate hikes to affect multiples," Hart said. "I'm more concerned about the macro impact on businesses. There are a lot of factors that go into a strong M&A market."

Bill Ridenour, president of Polymer Transactions Inc. in Foxfire, N.C., said he's seen fewer buyers in the first half.

"I think some buyers are holding back because of the volatility of the economy," he added. "And some owners are concerned to get deals done as quickly as possible before a recession, which could affect valuations."

The first quarter "was decent, but 2021 was an epic year, and that's hard to repeat," according to Rick Weil, managing director with Mesirow Financial in Chicago. He added that although many plastics firms still are performing well, they're facing challenges ranging from higher costs to supply chain issues to labor availability.

"Everybody's staring down inflation, and that may dampen some plans," Weil said. "It's more expensive to buy equipment, then you have to get people to install it and get people to work.

"In a lot of ways, deals boil down to the question of does the buyer have conviction about the quality of the asset," he said.

Although economic factors could impact the market, deals veteran David Evatz said that "there's still plenty of capital out there," including capital from private equity firms.

"There might be questions about buyers' ability to pay sellers' expectations," added Evatz, managing director with Stout Investment Banking in Chicago. "But there's still aggressive capital and financing, so I don't see a major issue. The bigger question is supply from sellers."

Andrew Munson, a partner at MBS Advisors in Florence, Mass., said that the M&A market "is going to slow down, it's just a question of how much and how bad it gets." But in spite of a slowdown, recent supply chain concerns should help domestic firms, he added.

"The last two years have put value on products made here," Munson said. "Manufacturing in the U.S. should be stronger than in other parts of the world for the foreseeable future."

Economic concerns "undoubtedly have introduced more noise in the M&A market compared to a year ago, but we're still seeing healthy demand from both private equity firms and strategic buyers," according to Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee.

Hinz added that most corporate balance sheets remain strong and private equity firms are looking to place large amounts of capital raised in recent years. "A continued imbalance in supply and demand — with more buyers than willing sellers of high-quality companies — should serve to keep valuations elevated even in the face of rising interest rates," he said.

Because of higher interest rates and economic uncertainty, "the universe of buyers will narrow," according to Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. "Higher interest rates affect the ability to close a deal," he said. "But some owners are scared and want to get out. We're seeing the same thing in real estate. It's a double impact."

"We could see lower valuations and multiples," said Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. "It will take some time for buyers to get used to a new reality."

Chad Comroe, managing director with Generational Equity in Dallas, said that the M&A interest level "is still pretty high," particularly from firms who are looking to expand their geographic footprint and be closer to customers. "We haven't seen anyone but the brakes on a deal yet," he added.

Packaging and medical again got high marks from financial pros when identifying attractive M&A deals.

"Medical is probably the hottest now, with packaging No. 2," Stout's Evatz said. "You have to look at how the end product is being affected. A lot of companies are passing on inflation costs, so you definitely have to look at volume, not dollars."

Phil Karig, managing director with Mathelin Bay Associates in St. Louis, said that packaging "is still strong" and that pipe, siding and other construction market could be affected if higher interest rates lead to less building activity.

"There's some caution around building products," added Petryk at BGL. "Automotive plastics are doing well — they're long-term positive because of vehicle shortages — and packaging was pretty resilient during the [pandemic] downturn."

Peter Schmitt, managing director at with Montesino Associates LLC in Wilmington, Del., agreed that medical and packaging were drawing interest, but he said that buyer might be more selective when looking at those firms. He added that buyer interest in recycling firms or those with sustainable products could be on the rise.

Comroe at Generational said that interest in medical "is still pretty strong" and that his firm has seen interest in thermoforming as well.

Blaige said that competition in medical and packaging has shifted interest to firms "at the top of the pack, not the middle of the pack."

At Grace Matthews, Hinz said that food and beverage and packaging for the medical and pharmaceutical markets should remain strong if the economy does slow down.

PMCF's Hart said that strong growth in rigid packaging was related to e-commerce trends during the pandemic.

"Two years ago, we were scared of everything for six months," said Weil at Mesirow. "But packaging performed well and made lots of money." He added that health care and pharmaceuticals "are a gigantic market" and that health and beauty also performed well during the pandemic.

PTA's Ridenour added that interest in recycling firms is growing.

"As virgin resin has become harder to get, there's great interest in helping people recycle," he said. "That window is now open."

At BlueWater, Miller said that there's been a shift from buying goods to services as the pandemic has receded. MPE "is seeing interest in businesses with a more stable demand profile, like medical, agriculture and utilities," Yohe added.

The changing economic picture could affect business owners who are deciding if they should sell their companies. If multiples and valuations go down, some might wait to sell. Others might want to do so sooner to avoid even worse market conditions.

"We look at three factors to sell: market prospects for transactions, where a company is at in its business cycle and where owners are at in terms of their needs," PMCF's Hart said. "We're not pulling back deals. We would take companies to market today knowing what we know." Yohe at MPE said that owners "need to figure out what's best for their personal timeline." At PTA, Ridenour said sale prices in the 2008 recession took two years to recover, meaning prices might not recover from a new potential recession until 2025. That might be too long of a wait for some owners.

Buyers also might avoid the market if financial performances decline, according to Mesirow's Weil. "If a company shows resilience, that could show value," he said.

On the owner side, Weil added that some owners "might say they had a good long run and want to go out on a high note. "Time is the one thing you can't buy more of," he said. "And running a business can be stressful even if it's profitable."

Businesses still recovering from the financial impact of the pandemic also might wait to sell, according to Munson at MBS.

"Right now, there's definitely an appetite for higher-quality companies that are performing well," said Wirz at Grace Matthews "If a company is underperforming, we'd probably suggest more of a wait-and-see approach."

But he added that if a seller is performing well and has good visibility on the near-term outlook, "it's hard to suggest waiting to launch a sale process."

Mathelin Bay's Karig said that buyers from within the industry might be affected by finding their access to capital limited by high interest rates.

"For an owner [the decision to sell] could depend on age," Montesino's Schmitt said. "But for a private equity company, it becomes how long they can sit on a fund."

PMCF data identified two other trends that might affect future deals. The involvement of private equity in plastics and packaging deals remained at 47 percent in the first half, equal to the first half of 2021. But in the same comparison, the amount of U.S.-only deals — with both buyer and seller based in the U.S. — increased from 35 percent to 42 percent.

Looking to the second half of 2022, financial pros are remaining optimistic, even if the horizon is cloudier than it's been in recent years.

"There's a lot of uncertainty as to whether there's going to be a recession or not," said Hart at PMCF. "As of today, the M&A market is still strong, but because of a pullback in foreign deals, the deal numbers might stay at lower level.

"We're not going to repeat 2021, but buyer's appetites are still hotter than they were before last year," he said.

MPE's Yohe expects "some softening, but nothing abrupt" in the second half. Ridenour added that a decrease in energy prices could help some second-half deals get done.

"Based on our pipeline, business should be fairly steady," Evatz added. The M&A market "isn't going to fall off a cliff," said Munson. "It helps that companies have been able to pass along higher costs."

Blaige pointed out that the current strong M&A cycle has lasted 12 or 13 years, much longer than previous seven-year cycles. "We could see some latecomers buying in the second half," he said.

"I don't think we'll match the second half of 2021," Petryk said. "But the industry is still interested in companies with real, volume-related growth."

The M&A market "might glide down, but nothing serious," according to Karig. "Unfortunately, there's no reason to think that [the second half] will be as good as last year, with the cost of money going up and a recession knocking at the door," Schmitt said.

"Anytime things are less certain, buyers will be more cautious," said Miller. "But there's no drop in demand for good companies — there's too much capital chasing too few good companies."

Looking even further ahead, Comroe said that a recession could even allow buyers "to add good companies at a good price."

"We can still have a good third quarter, and hopefully a good fourth quarter, but things are riskier now than they were a year ago," he added.

"I don't have rose-colored glasses," Weil said. "There will be some challenges with the cost of capital being higher, but [the U.S.] is the most resilient economy in world, and companies continue to prosper in our sector."