Midyear M&A: Buyers stepped forward as private equity stepped aside

In a surprising turnaround, strategic buyers in the plastics market held off the private equity barbarians at the gate in the first half of 2019.

PE firms had made inroads against strategic buyers in recent years, but in the first half, the number of PE-related plastics deals declined from 88 to 73 when compared to the first half of 2018. That's a drop of almost 20 percent.

"The strategics have stepped up in the first half," said John Hart, managing director with P&M Corporate Finance in Southfield, Mich. "They're outbidding and outselling private equity now. They're going to these owners and founders and saying they can do something with their companies."

Strategic buyers "are saying they can bring more resources or saying that private equity will flip the company in a few years and pile on debt," Hart added.

The overall number of plastics deals grew 3 percent, from 164 to 169 in the same comparison, according to PMCF data. By end market, the number of construction plastics deals more than tripled in the first half from five to 17. The number of medical plastics deals was up 50 percent, while the amounts of industrial and consumer deals each dropped more than 15 percent.

By sector, the number of first-half injection molding and specialty deals each was up at least 10 percent, while the number of sheet/thermoforming deals slipped by 25 percent.

By product segment, the number of building products deals — as in construction — more than tripled. Custom molding deals also saw a robust jump of more than 50 percent, while the number of industrial deals slid more than 10 percent.

In spite of the first-half slump, private equity investors aren't going away from the plastics market anytime soon.

"Private equity is getting smarter," said Bill Ridenour, president of Polymer Transaction Advisors Inc. in Foxfire, N.C. "They're bringing good advisers on board. There's a lot of experience leading the charge."

PE is "still compelling" to a lot of industries, according to Phil Karig, managing director of Mathelin Bay Associates LLC in St. Louis.

"There's been a lot of consolidation so far in plastics, but there's still a lot that can occur in color concentrates and other areas," he said. "That's attractive to private equity."

Matt Yohe, a partner with investment firm MPE Partners in Cleveland, said that his firm recently completed its first add-on with injection molder Plastic Components Inc., when it acquired Syracuse Plastics, another injection molder.

Yohe added that PCI "had a lot of runway to grow" and that MPE is looking to use the firm to buy more molders.

"At some levels, PE has become a commodity just like resin," according to Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. "Private equity is instrumental in mega deals and for serial acquirers like Wind Point [Partners] and Arsenal [Partners]," he said.

Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland, added, "[PE firms] are looking for size, and plastics is still fragmented."

Industry veteran Peter Schmitt cited the example of plastics processor and compounder Tekni-Plex, which he said has had four different PE owners over its history. PE "can find a lot of opportunities to consolidate and do well when they do it," said Schmitt, managing director of Montesino Associates LLC in Wilmington, Del. "They can find the original entrepreneurs and work with them."

Earnings multiples paid for plastics firm have climbed into the high single digits in many cases and sometimes well beyond.

"We see some companies getting higher prices than they would because there's so much interest," Rick Weil, managing director with Mesirow Financial in Chicago, said. "Buyers are being more discerning and there's more rigor in due diligence, but prices are still high because the interest level is high.

"Buyers far outnumber sellers," he added. "If your company is performing well, you can get a good price."

Blaige cautioned though, that sellers shouldn't expect something for nothing. "Unless you're someone with audited financials and good metrics, you're not going to get 10 times EBITDA," he said.

Karig, at Mathelin Bay, added that sellers' expectations "continue to be high" for sale prices. PTA's Ridenour noted that "everyone realizes prices are as high as they have ever been … some owners have delayed selling until 2019 to get a higher price."

"It's a seller's market, but it's a large pond in which to swim," he said.

Although interest in plastics businesses tied to the automotive market has been slow, Ridenour said that interest from most other end markets has been good. Karig commented that medical plastics and plastics packaging "still are very much where the interest is and where it will continue to be."

Buyers are seeking companies "that might not be recession proof" but are resilient," said Yohe at MPE. "Industrial and auto are facing some tailwinds, but, in general, we're looking for plastics manufacturing with either a differentiated value proposal to customers or with proprietary processes or products."

David Evatz, managing director with Chicago-based Stout Investment Banking, cited medical plastics firms that do contract manufacturing and packaging firms that create highly engineered packaging as businesses "that do well in a downturn."

"Flexibility and design make plastics more attractive," he said.

Mesirow's Weil cited food, health and beauty, medical and foodservice as plastics markets that are "very resilient." Packaging continues to do well, said Petryk at BGL, while interest in automotive "is relatively flat."

"Every company is looking for medical, pharmaceutical and aerospace," Blaige said.

In spite of the high level of interest, Hart said the number of plastics packaging deals actually declined by almost 9 percent in the first half, meaning that seven fewer deals were made than in the first half of 2018.

That decline "appears to be driven by scarcity of acquisition targets, rather than lack of demand for packaging companies," he added.

In the selling of plastics firms — just as when a magician throws a knife at his assistant spinning on a wheel — timing is everything.

And at the same time, the essence of timing is not the only thing in play.

"We sold a company last year for a seller that didn't pick the highest offer, but instead chose a buyer that he liked better and that allowed for a smoother transition," said Terry Minnick, chairman of MBS Advisors in Florence, Mass.

"On the other side, a few years ago, we tried to sell a small company where the owner, as soon as he decided to sell, took his eye off the ball and his sales dropped and the deal didn't get done," Minnick added.

Market watchers said some PE firms are selling their plastics assets sooner than they had planned in order to cash in on high multiples. Original owners might be moved to sell for the same reasons.

"A lot of sellers are concerned the wave is going to end, and they want to get their money while they can," Weil said. "If you're the founder, the second generation might not want the stress of running the company."

"There's some uneasiness that the music may stop," added Karig. "Owners see these high valuations and want to take advantage. It's like looking at home prices on Zillow and being tempted to sell."

Evatz at Stout agreed that high valuations "are driving more sellers to come to table."

"For a private business owner, it's difficult to consider keeping the company if there's no next generation," he said. "Some businesses sell to private equity and keep a stake in the business. A majority of the time, the preference of private equity is to have the management team stay on."

And sometimes the decision to sell or not comes down to what Ridenour described as "a lifestyle decision."

"We represented an injection molder in the Cleveland area and got an offer that was 10 percent higher than expected," he said. "But the owner decides not to sell because he wanted to stay active."

The outlook for the second half of 2019 looks to be as solid as first-half results were. PMCF "continues to expect robust M&A activity to continue through 2019," Hart said.

Reasons Hart cited for his positive outlook include elevated multiples, buyers' willingness to pay premiums for quality plastics and packaging firms, continued industry consolidation and favorable debt markets.

In some cases, larger plastics firms assembled by multiple deals might need to take action because of their sheer size, according to Schmitt at Montesino. "These companies get to a certain size and then they need to go to an [initial public offering] or do something else," he said. "It becomes hard for them to get results because of the amount of capital involved."

Schmitt added that another big question is what happens when the plastics M&A field faces an economic recession.

Market watchers added that recent public outcry over plastics pollution, recycling of single-use plastics and bans of plastic bags don't seem to have had any impact on M&A activity.

"There's been a lot of bad press, mainly in the packaging market," Karig said. "But it's not scaring anyone away, even if some consumers are virtue signaling by buying recycled content or nonplastics products."

Plastics sustainability issues "aren't scaring off buyers, but they do come up in conversations now," Petryk added.

Overall, Yohe at MPE said that "we don't see anything that would lead to a slowdown."

"A slowdown eventually will come, but probably not in the second half of 2019," he added.