Plastics M&A bounces back

After a challenging first half, the plastics mergers and acquisitions market bounced back in the second half of 2023.

In the last six months of the year, the number of plastics M&A deals came in at 205, up 16 percent vs. the 177 from the first half, according to data compiled by P&M Corporate Finance of Southfield, Mich. For full year 2023, plastics M&A deal volume was up 5 percent to 382 deals.

The number of injection molding deals in 2023 grew by 41, an increase of 47 percent. The number of film transactions, however, fell by 14, a decline of 24 percent. By end market, food and beverage deals were up 30 percent, with industrial deals up 13 percent. Construction was the end market with the biggest decline, with the number of deals down 41 percent.

PMCF Managing Director John Hart said the increase in injection molding deals could be a function of increased private equity ownership.

"There have been a lot of add-on deals," Hart said. "But injection molding is still the most fragmented area in plastics."

Interest rates continued to rise in the second half of 2023 but at a slower rate than they had in the first half. The federal funds interest rate began 2023 at between 4.25-4.5 percent before four hikes sent it to between 5.25-5.5. The rate had been 0.25 percent at the start of 2022, before the Federal Reserve began a series of rate hikes designed to slow inflation.

Those moves have cooled inflation, which peaked at 9.1 percent in June 2022. The rate had steadily declined from there, reaching 3.1 percent in November before ticking up to 3.3 percent in December. Inflation had averaged around a 2 percent annual rate for most of the 2000s and 2010s.

With inflation down, the Fed now is considering lowering interest rates in 2024. If this happens, then it potentially could have a positive effect on M&A deal volume by reducing the cost of borrowing, which could cause earning multiples to rise and lead to higher selling prices.

Among economic indicators, U.S. gross domestic product growth was expected to come in at 2.6 percent for full year 2023, after being up just over 2 percent in 2022. The Dow Jones Industrial Average began the second half of 2023 near 34,600 but finished the year just over 38,000 for a gain of almost 10 percent in the final six months of the year.

Financial pros contacted recently by Plastics News shared their opinions on where the plastics M&A market stands as the industry heads into 2024.

"A lot of second-half activity was from deals that normally would have closed in the first half," PMCF's Hart said. "In late 2022 and early 2023, it was tough to get deals done because of market uncertainty and the higher cost of debt. But as [2023] continued on, the market and the lending environment got better. People became more confident with the outlook."

Peter Schmitt, managing director with Montesino Associates LLC in Wilmington, Del., is cautiously optimistic that interest rates "will go down a little bit."

"Private equity firms are so well funded, and they have to do something with that money," he added. "I don't think it's pedal to the medal yet, but people are making better decisions and the economy is basically doing well."

The back half of 2023 "picked up," according to Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee, but the year overall "was plagued by lack of visibility and challenged from an earnings perspective." Heading into 2024, he added that "inventories have normalized and are closer to historic levels, so there's more confidence."

The second half was slightly better because of pent-up demand and because of companies from Europe and Japan looking for better business conditions in the U.S., according to Bill Ridenour, president of Polymer Transaction Advisors in Foxfire, N.C. He added that higher interest rates "have blown some deals. … Buyers now have to modify their offers for risk."

Mesirow Financial of Chicago completed 10 packaging M&A deals in 2023, which was "a good year" for the firm, according to Managing Director Rick Weil. "The world stabilized as 2023 went on and people got their confidence back," he said.

Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland, agreed that second half deal volume "was much stronger" than the first half.

"The first quarter [of 2023] had bank failures, high inflation and higher interest rates, so lenders were sitting on their hands," he said. "It was a difficult deal market into summer. … There was a little bit of a shock, but once people adjusted to change, they stepped back into the market."

"[Private equity firms] have to put their capital to work, even if higher interest rates affect valuations and even if inflation affects cash flows," said Matt Miller, managing director with Cascade Partners LLC in Grand Rapids, Mich. PE firms are sitting on about $2.6 trillion in cash reserves, with that capital "being idle for several months," according to Brian Flynn, investment banking director with William Blair in Chicago.

"During the second half of 2023 and heading into 2024, we're seeing the private equity investor begin to return to the M&A arena, which was largely strategic-only during the first half of 2023," he said.

Flynn added in the second half of 2023 his firm "saw a narrowing of the bid-ask spread, as buyers and sellers started to adjust perspectives on valuation to the higher interest rate environment."

"As visibility into macroeconomic and business-specific outlooks continue to become clearer, we anticipate the bid-ask spread will continue to narrow, which will assist in driving more M&A activity," he added.

Lower inflation "gave people confidence that interest rates weren't going to skyrocket," said Andrew Munson, a partner at MBS Advisors in Florence, Mass. "But there's a major difference between markets for good, profitable companies in strong end markets and others that aren't doing so well."

Several financial pros said because of higher interest rates, buyers in the second half of 2023 often were putting more equity into transactions and taking on less debt.

"A lot of private equity companies are putting more equity in or adding earnouts to deals," said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago.

Packaging and medical continued to be the plastics end markets to draw the most attention in the second half as the building and construction and even the automotive end markets struggled.

"The tentpoles are packaging and medical," said Phil Karig, principal with Mathelin Bay Associates in St. Louis. "There's also interest in more direct-to-consumer products and outdoor equipment."

"Medical, health care, biotech and pharma are all doing well, and packaging is still good," added Munson at MBS. Buyers are interested in packaging firms if they're "horizontally strong" or injection molders that can offer full-service manufacturing and "one-stop shops that can build the whole device," according to Steve Bieszczat, chief marketing officer with DelmiaWorks, a manufacturing software provider in Paso Robles, Calif.

Although the market for packaging M&A is good, there's "a lot of regulatory and recycling focus" that buyers have to keep in mind, said Matt Yohe, partner at MPE Partners in Cleveland. He added that building and construction is "a very challenging environment with a lot of uncertainty," as higher interest rates have affected the pace of new construction.

Packaging M&A demand is "pretty significant, which is a little surprising because of higher interest rates," according to David Evatz, managing director with Stout Investment Banking in Chicago. Other markets such as automotive and heavy truck "reached their low point for the last several years" in the first quarter of 2023 and are recovering, he added.

Food and beverage packaging "are performing consistently with the economy," BGL's Petryk said. Weil at Mesirow added that food and pharmaceutical packaging "are the gold standards. … Health and beauty products are very resilient."

"We don't see a move away from packaging," added Hinz at Grace Matthews. "It's still attractive long term. Housing and construction are a bit softer, and automotive saw an uptick last year."

Interest in medical deals "has come up again," according to Darrin Kert, M&A director at Plastics Machinery Group in Bedford Heights, Ohio. Packaging deals also are drawing interest "when they get to economy of scale," he added.

At William Blair, Flynn said packaging and other end markets that saw "stable, consistent consumer demand" are receiving elevated investor interest compared with sectors that had large levels of inventory building followed by destocking.

Another possible trend for 2024 M&A, according to Montesino's Schmitt, is the spinoff by materials firms or other large companies of parts of their business.

"Smarter companies know that when they get too big, they can't manage everything," he said. "They look to integrate where they can, but at some point, they need to decide how big is too big."

Sustainability — through recycling, bio-based products or reduced carbon footprints —continues to draw interest from investors. Financial pros said, in some cases, a company with a more developed sustainability strategy can draw more bidders than one without a focus on that part of the business.

"There continues to be drumbeat for sustainability," Hinz said. "People ask about it in due diligence. It's not a deal-breaker, but having a sustainability strategy definitely helps."

"[Sustainability] is an important consideration," Petryk added. "We're asked about [it] in every transaction."

Buyers often have "a common initial set of questions" about sustainability, according to Evatz at Stout. "You really need to have good visibility on it," he said. At PMCF, Hart said sustainability is "one of the most critical aspects in single-use packaging; you want to make sure you have a plan."

There's still "significant interest" in products with recycled or bio-based content, according to Cascade's Miller.

Blaige added some buyers like to see recycled PET in food-grade applications, while a growing number of buyers "want post-consumer recycled content than post-industrial."

"Investors continue to become further educated on sustainability and understand there's not one solution to the topic," said Flynn at William Blair. "As a result, investors are not taking binary views on investing — such as 'plastic is bad.' … They're assessing the sustainability profile of each investment opportunity."

Weil at Mesirow countered that while sustainability is still important, a lot of buyers "still care more about cost and function and performance."

With interest rates potentially declining as 2024 goes on, business owners will need to decide if they want to put their firms up for sale in the first half or wait until the second half in hopes of getting higher sale prices. Financial pros, however, pointed out waiting has its own set of risks.

"Standard logic was that if the economy is reliable, you could sit back and wait," said Ridenour at PTA. "But that's not the case now, since we could be going into a volatile situation."

"Sellers already have a target price in mind," Blaige added. "A lot of valuations depend on performance." According to Munson at MBS, "there isn't a macroeconomic format that decides when you should sell — it's company-by-company and based on individual circumstance."

Karig at Mathelin Bay pointed out business owners "always deal with risk, but if they're seeing good results and they're at that point in their careers, they might start thinking about selling."

"I think we'll see more companies coming to market [in the first half], especially if their orders are up," said Kert at PMG. "You can't beat the clock."

The M&A market "already is pricing in interest rate reductions by March or midyear, so the decision to sell is more a function of a specific business," said Miller at Cascade. And the 2024 deal environment "already is better than last year, so you won't necessarily see a big improvement if you wait to sell until later in the year," according to Yohe at MPE. "Owners need to [decide] what makes sense to them and their company."

Trying to time the sale of a company "might not be that scientific," added Hart at PMCF.

"The market is good right now for a well-positioned plastics company," he said. "If an owner is considering going to market, it's more about company performance."

Most of the experts interviewed for this story are optimistic about plastics M&A as the market heads into 2024. "If the economy continues to improve, cyclicals will come to market this year and we could see growth that continues into 2025," Blaige said.

"We expect M&A deal volume to accelerate as we get deeper into 2024," said Petryk at BGL. Mesirow's Weil added that 2024 "will be an active year, with a lot of deals and opportunities for sellers to exit their businesses."

"I think the comeback will continue," said Ridenour at PTA. "But strength is the question. Some business indicators are looking better than others."

Hinz said he expects PE firms to be more active as sellers in plastics M&A in 2024. "There weren't as many [PE] exits in 2023, and they can only do that for so long," he added. "They're in the business of buying and selling."

Although some concerns remain for 2024, Stout's Evatz said buyers "now understand what the cost of capital is" and that combined with demand on both the strategic and financial side "will lead deal flow to go into the market."

Bieszczat at DelmiaWorks agreed that even with political and geopolitical headwinds, there's "a lot of value to be realized" in plastics M&A.

PMG's Kert added he expects deal volume "to accelerate from the middle market down" in 2024.

"The first half [of 2024] should be better," said Hart at PMCF. "There are a lot of deals coming to market. Multiples might be down in some cases, but not in others."

Flynn at William Blair anticipates a strong first half for several reasons, including the fact many are in a much better position than they were at the start of 2023. Schmitt at Montesino said buyers "are finding good ideas; they're not just doing deals for the sake of doing deals."

Karig said he also expects increased deal volume in plastics M&A in the first half. "Once the boat gets moving, it takes a while to slow down," he added.