Fernandina Beach, Fla. — Deal-making in the packaging industry is expected to ramp up during the second half of the year after slowing down over the last several months.
Mergers and acquisitions have been on a bit of a roller-coaster ride in recent years — first impacted by COVID-19 in 2020 and then rebounding for a record year in 2021. They later became "highly muted" during the last half of 2022 due to deteriorating financial market conditions, said Vivek Singh, managing director with TD Securities.
Pandemic-impacted 2020, he said, "had a significant decrease in M&A activity, which was to be expected. But the takeaway here was the fact that it rebounded so quickly in 2021 with 2021 actually being a record year for packaging M&A globally."
He estimated global packaging M&A activity was worth $47 billion in 2021.
The hot streak continued into the first quarter of 2022 with $15 billion worth of deals before falling to $8 billion during the second quarter and then just $3 billion for each of the third and fourth quarters.
In 2020, as the world dealt with the initial stages of the pandemic, only $15 billion worth of packaging deals were made for the entire year around the world. And the vast majority of that total — $9 billion — came during the fourth quarter, Singh said.
Key factors driving M&A activity in 2022 included continued interest from private equity in the segment.
"I think a lot of these buyers have noticed the attractiveness of the sector. The attractive margins, the above-average growth rates, the defensive nature of the industry and, in certain cases, the consolidation opportunities that exist within the industry," Singh said.
Other trends for 2022 included moves being made due to investor activism and portfolio rationalization and smaller, family-owned companies cashing out due to strong valuations. Some M&A activity was driven by buyers seeking packaging firms that fit in with sustainability goals, and other activity was due to a desire for buyers to vertically integrate.
COVID-19 initially caused both consumers and companies to pause their focus on sustainability, but the industry is now back to the point where the issue is front of mind, said Jerome Tardif, a TD Securities vice president who shared the stage with Singh.
Singh said he expects the slower M&A trend will continue during the first quarter of 2023, but he sees a return to higher activity later in 2023 and 2024.
One driver that could increase deal-making is the stockpile of cash that private equity firms have raised over time and are now waiting to deploy.
"They are waiting for the markets to open up a bit," Singh said. "There are a lot of deals on the back burner waiting."
Packaging has always been an interesting segment for mergers and acquisitions due to the high level of fragmentation, Singh said. It's this fragmentation that provides investors with opportunities to consolidate and create value by stitching together assets to create larger operations. Private equity firms are fond of calling them "platforms" for growth.
Historically, Singh said, strategic buyers — those already in the business — could outbid private equity firms for acquisitions as they could create synergies through combined operations. But with all the money flowing into private equity, the reverse has been in place during the past three years.
I think a lot of these buyers have noticed the attractiveness of the sector. The attractive margins, the above-average growth rates, the defensive nature of the industry and, in certain cases, the consolidation opportunities that exist within the industry."