Plastics M&A bounces back in second half, outlook positive for 2021

The pace of plastics mergers and acquisitions deals improved in the second half of 2020, after a first half that was impacted by the COVID-19 pandemic.

Financial pros contacted by Plastics News are optimistic that recovery will continue into 2021.

P&M Corporate Finance of Southfield, Mich., tracked 285 plastics and packaging deals for full-year 2020. That number was down 15 percent — or 52 fewer deals — vs. 2019.

After only 118 deals were completed in the first half of 2020, activity bounced back to 167 deals in the second half — only one deal less than the number from the second half of 2019.

Multiples paid also have remained relatively high — often in the high single digits — as the number of interested buyers in plastics M&A continues to surpass the number of companies for sale.

"We're encouraged by how resilient the plastics industry and M&A have been," PMCF Managing Director John Hart said.

Here's what M&A pros contacted by Plastics News had to say about 2020 — a year best forgotten for many reasons — and what their expectations are for 2021.

After deal activity crashed in the second quarter, it began to come back in the third and continued to rally in the fourth. Some of this second-half activity came from deals that were postponed from earlier in the year.

"We were sweating bullets in March," said Andrew Munson, a partner with MBS Advisors in Florence, Mass. "We're a smaller firm, but we ended up having a record year. The market to buy or sell good companies didn't slow down at all."

Private equity firm MBE Partners of Cleveland saw significant recovery in the third quarter from industrial firms and other plastic companies. "The return of physical production was a big psychological part of it," partner Matt Yohe said. "Now the recovery seems broad-based and sustainable."

The second quarter was the hardest hit for M&A activity, according to David Evatz, managing director with Stout Investment Banking in Chicago. Stout tracked 369 plastics M&A deals in 2020, down 7.5 percent vs. 2019.

"There was a lot of activity in the fourth quarter as we gained more visibility on [COVID-19]," he said. Evatz added that some deals tried to be completed by the end of the year because of the expectation of higher taxes from the administration of U.S. President Joe Biden.

Financial firm Grace Matthews Inc. of Milwaukee had a balanced year, closing six deals in the first half and five in the second. Managing Director Andrew Hinz said those deals were a combination of new activity and ones that had been put on hold.

"The pipeline was filling up, but in some cases it took longer to close deals because of restrictions on travel," Hinz said.

Mesirow Financial of Chicago closed six deals in the second half after completing only two in the first. "It's amazing what people were able to accomplish by working from home," Managing Director Rick Weil said. "Zoom was a lifesaver."

"We're in the middle of a recovery," added Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Foxfire, N.C. "There are deals that are active now that had been delayed for a while."

Even with a recovery underway, the ongoing impact of COVID-19 continues to affect plastics deals.

The pandemic "affects every deal we're working on," said Hart at PMCF. "We try to figure out what changes will be short term and which will be long term."

Packaging demand in general has benefited from the pandemic, he added, with people buying more groceries and eating at home more. Hart said the trends toward home offices and doing deals virtually aren't expected to go away.

Investing in companies that make packaging or medical disposables or other health care items provide access to "a defensible end market," according to Jim Berklas, who opened consulting firm Augmented Industry Services last year in West Farmington, Conn. Berklas worked for Las Vegas-based injection molder Westfall Technik Inc. from 2017 until earlier this year, helping the company complete 17 acquisitions.

Blaige & Co. of Chicago was able to complete a deal involving private equity firm HIG Capital of Miami and two California plastics companies by using Zoom for management presentations and due diligence, Chairman and CEO Thomas Blaige said.

"There was less face-to-face interaction than usual, but overall things weren't as delayed as we might have expected," he added.

Blaige said his firm saw plastics M&A affected on three different levels in the second half of 2020, with raw materials being down before bouncing back, packaging breaking even and nonessential businesses like automotive still not back to pre-pandemic levels.

The second-half deals seen by Stout are for "consumable-type products" in consumer, medical and flexible packaging, Evatz said.

"Some opportunities are up in the short term, while others, like building and construction, could be up long term as people choose to live in houses instead of cities," he explained.

"We're seeing good prices and active buyers," said Weil at Mesirow. "Once people figured out where the ground was and that [the pandemic] wasn't the end of the world, we found out that packaging was an essential resource.

"Eating at home can be safer. … I don't think trends towards staying at home and using e-commerce have changed yet," he added. "Amazon uses a lot of packing envelopes."

Demand for medical masks and for the nonwoven plastic fibers needed to make them "is here to stay," according to Peter Schmitt, managing director at Montesino Associates LLC in Wilmington, Del.

Working from home and not spending as much on travel and clothing has freed up more disposable income for consumers to spend, said Phil Karig, managing director with Mathelin Bay Associates in St. Louis.

The trend toward higher building and construction activity also should continue, according to Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. "People are still investing in their homes and upgrading as well as building new housing," he said. "In 2020, they may have thought COVID-19 was going to be shorter term, but now they're viewing work from home as the norm."

"They're investing in home offices and putting in pools and decking because a lot of people aren't traveling for vacation."

Contrary to expectations, the second half of 2020 didn't see many distressed deals, where plastics firms were sold because of financial difficulties caused by the pandemic. M&A pros said that government stimulus payments to individuals and Paycheck Protection Program loans given to businesses kept many firms afloat.

"Stimulus effort kept consumer spending robust and helped the quick recovery," said Yohe at MPE. PPP loans "helped some companies stay open," PTA's Ridenour said. Blaige added that a lot of plastics packaging firms "worked their way through the pandemic."

Stimulus payments "had an enormous impact on some companies' ability to survive and thrive," according to Matt Miller, managing director of Bluewater Partners LLC in Grand Rapids, Mich. He added that many firms restructured and "took other actions to put themselves in position to survive."

Some M&A pros, however, believe that the number of distressed deals could increase in the second half of 2021, as financial results from 2020 become clear.

"There hasn't been enough time for some of these restructurings to surface," said Petryk at BGL. "Banks may not have received some results until August or September and then spent the rest of 2020 going over them."

Stout's Evatz agreed that the plastics M&A field could see more distressed deals this year. "There's a need for additional relief, but banks will work with existing lenders on debt if they're struggling," he said.

The pandemic may have led to changes in how plastics M&A deals are structured. Some deals saw more equity involvement from original owners, while others saw financial buyers place more equity in the companies they were buying. In some cases, earn-out clauses — where the amount a seller is paid depends on the performance of the company over a period of time after the deal — were put into place or at least considered.

Opinion was mixed among financial pros as to how prevalent these trends were. "There was an increase in the amount of equity in deals, and a slight uptick in earn-outs, but not much," PMCF's Hart said.

Financial firms "will put more down [in equity] if they have to, but they don't usually want to," Blaige added. At Stout, Evatz said when PE buyers establish a new platform, they often prefer the owner to stay on and retain a minority stake.

Petryk and Weil said they're seeing relatively few earn-outs because of how complicated they can be and because of the risk involved. Hinz said he's seen "more creative deal structures," but not necessarily earn-outs.

The change in perception of the pandemic may have impacted earn-out discussions, according to Miller at Bluewater. "A few months ago, there was more talk of earn-outs as people worked their way through COVID-19," he said. "Now it seems like the panic has mostly subsided, and there's less talk about earn-outs as a way to share risk."

Another potential trend making its way through the plastics M&A market is an increased focus on smaller firms, including those with less than $5 million in annual EBITDA. Berklas sad this change is happening because of increased competition in the market.

Munson at MBS said that some private equity firms already specialize in companies with EBITDA in that range, but he added that "outside money" has led to more competition and more interest in smaller firms.

At Grace Matthews, Hinz said that so far he hasn't seem buyers go "down market" as much as they did in the recession of the late 2000s. Evatz at Stout said that investors "are lowering their threshold in general to find opportunities. … There's a scarcity of deals and a lot of competition."

"When there's a scarcity of sellers, buyers compromise their criteria," PMCF's Hart added.

"EBITDA matters, but your company's track record matters, too," Blaige said.

The pandemic also has had an impact on plastics company owners who might be thinking about selling their firms. Some owners who were negatively impacted might want to sell sooner than later, while some might want to hold on for another year or two until their finances improve, resulting in a higher sales price.

"If an owner was looking to sell sometime in the future, COVID-19 has been an eye-opener," Hart said. "They realized that something like this could really impact amount the amount they would get in a sale, and that prompted them to start the planning process."

He added that even though some sellers might want to delay a sale to build their businesses back up, some that have benefited from the pandemic, such as some packaging firms, may want to sell while results are trending upward.

"The uncertainty could make owners go either way," PTA's Ridenour said. "There definitely are some owners who are concerned about the future of their companies. We saw the same thing in the last recession."

The possibility of higher taxes under a new administration, or of tax increases reducing the amount of money available for M&A, also could affect owners' decisions, he added. Mathelin Bay's Karig agreed that potential tax changes "could make owners want to get deals done."

"It always comes down to individual decisions from business owners," said Yohe at MPE. "What's different now is the economic downturn and health crisis resulting from COVID-19. That could cause some owners to pull their retirement plans forward."

The pandemic "has created more turbulence than the last three or four years combined," said Munson at MBS. Schmitt added that whether a company has a secession plan in place also could affect the decision to sell.

"Some buyers will take the best deal they can get now, because they don't think there will be a better economic or regulatory environment," Blaige said. At Grace Matthews, Hinz said his firm is seeing some sellers in those situations using COVID-19 as reason to sell sooner than later.

"They think the environment is going to be more risky, with higher tax rates and interest rates, and they'd rather not think about it," he explained.

One owner told Mesirow that he was "tired and done" and was looking to sell. "I think COVID-19 took a lot out of some owners," Weil said.

In spite of the challenges of the pandemic, the strong plastics M&A performance seen in the second half of 2020 has financial pros optimistic about 2021.

"I think the market will accelerate and return to pre-2020 levels and beyond," Berklas said. Munson added that 2021 should see "a slight return to normalcy," but that the market won't get back to pre-pandemic levels until 2022, by which time a vaccine should be fully deployed.

2021 should be "a decent M&A environment," said Schmitt at Montesino. "There will be some speed bumps, but companies can adjust or have the flexibility to avoid them," he added.

Blaige expects a 10 percent increase in plastics M&A deal volume in 2021, as pent-up demand partly overcomes concerns about plastic bans and similar challenges.

"We're pretty bullish on 2021," said Evatz at Stout. "There are a number of deals in the pipeline, and it should be a strong year for M&A in plastics and packaging. We can get back to 2019 levels."

Mesirow's Weil also is positive about 2021, citing "a very active buyer community and financial community."

"Multiples will recover in 2021 as financial buyers push the market," said Karig at Mathelin Bay. "A lot depends on the course of the virus and the vaccine rollout, but there's a lot of pent-up demand and disposable income available."

At Bluewater, Miller's outlook also is positive. "After a brief pause, we expect deal volume and valuations to return to 2019 levels and beyond," he said.

The plastics M&A market bottomed out in April and May 2020 when only 17 deals were completed, according to P&M Corporate Finance. By comparison, 48 deals were completed in those same two months in 2019.

The year finished strong with 65 deals in November and December — up from 51 in that period in 2019.

Among major end markets, food and beverage took the biggest hit in plastics M&A in 2020, with the number of deals tumbling 50 percent for the year. The number of deals in the construction market plunged 33 percent. The number of industrial deals showed a surprising 13 percent gain for the year.

Based on industry sector, the number of sheet and thermoforming deals was down 48 percent in 2020, while the number of resin, color and compounding deals jumped 13 percent.

By product segment, the number of flexible packaging deals skidded 41 percent, with the number of custom molding deals bucking the trend and rising 18 percent.

Private equity firms were involved in 41 percent of plastics M&A deals in 2020, down from 45 percent in 2019. It's the first time in six years that the level of PE participation in the market declined.