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April 21, 2020 07:00 AM

Plastics M&A deals hampered by COVID-19

Frank Esposito
Senior Staff Reporter
Plastics News Staff
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    Stout
    David Evatz, Stout

    Deal volume in plastics mergers and acquisitions has declined in 2020 because of the impact of COVID-19.

    The Investment Banking Group at Chicago-based Stout tracked 93 global plastics M&A deals in the first quarter of 2020, a level close to the average of the last several quarters. But Managing Director David Evatz said in a research note that "a number of factors are likely to result in a decline in M&A activity during second quarter of 2020 and possibly beyond."

    According to Evatz, these factors include declining company performance in certain sectors and potential lower valuations, as well as inability to travel and other challenging logistics around due diligence.

    "From a buyer's perspective, there continues to be significant equity capital available for transactions from private equity groups and certain strategic buyers, although many will likely be sidelined until there's clarity on the long-term economic impact of the COVID-19 crisis before jumping back into M&A," he said. "In addition, there's currently disruption in credit markets, which may result in reduced availability of debt financing for transactions.

    "We [also] are likely to see an increase in special situation transactions involving companies struggling with liquidity … and overall performance declines."

    Focusing on March, P&M Corporate Finance of Southfield, Mich., said that global M&A volume fell sharply in plastics and packaging for the month, with COVID-19 negatively impacting a large number of transactions in process.

    COVID-19 "has certainly had an unprecedented impact on the global economy, stock market performance and M&A activity in a very short time period, [and] plastics and packaging M&A was no exception," PMCF Managing Director John Hart said in a report.

    "Deals are still getting done in this environment, but it appears to be with companies that haven't been materially impacted by COVID-19," he added. "We expect to see lower M&A activity in plastics and packaging for the next couple of months as a result."

    The number of deals in the blow molding, injection molding and film sectors all experienced declines in March, according to PMCF, continuing a downward trend that started in February. Resin/Color and Compounding and Specialty were the only sectors not negatively impacted, both showing increased activity for the first quarter of 2020.

    Investment firm Mesirow Financial of Chicago said in a report that the impact of COVID-19 could cause "significant declines in both public and private M&A activity." Large companies with strong balance sheets and private equity firms — both of which often can pay cash — may look to buy at depressed valuations, officials said in the report.

    Liquidity concerns may result in forced sellers — either of entire companies or of business units — and hostile deal activity may also increase, they added.

    At MBS Advisors in Florence, Mass., partner Andrew Munson said that "a lot of in-process M&A deals have been put on the slow train or paused completely" because of COVID-19.

    "The automotive and appliance markets have been hurt and deals that were in process in these industries are likely to fall apart," he explained. "Construction and building products are likely to take a huge hit as well. I think it's going to take a long time for these industries to recover.

    "On the other hand, medical/health care and food packaging sectors have largely been unaffected and investor interest here hasn't changed much."

    Munson added that the lending market for lower middle-market M&A deals "is very tight at the moment … [which] should lower transaction multiples across the board and definitely hurts the ability to get deals done in the current environment."

    Andrew Petryk, managing director at Brown Gibbons Lang in Cleveland, agreed that although the automotive market "has been particularly hard hit," food packaging remains strong. He added that residential construction "is expecting to get hit hard" late in the second quarter and into the summer.

    A key point for plastics M&A during the COVID-19 crisis will be how long the U.S. economy will be hampered, according to Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Foxfire, N.C.

    "If there's a quick return to business, we might return to normal because the economy had been so strong earlier in the year," he said. "A lot of plastics businesses are doing well in areas like medical, packaging, frozen food and pharmaceuticals."

    But Ridenour added that several M&A deals are on hold for various reasons, including restrictions on travel by states or companies or outside firms. Sellers' expectations for high multiples might lead to them not selling at all, he said, and distressed sales also could happen if plastics firms see negative financial results.

    Seventeen plastics firms that Ridenour is working with are seeking Small Business Administration loans during the crisis. He said that SBA loans "are good for workers as well."

    At Blaige & Co. in Chicago, Chairman and CEO Thomas Blaige said that buyers during the COVID-19 crisis "are still interested, as long as they can get credit and companies are performing well."

    He added that sellers "still want the same price" and that in some cases, banks and lenders "don't know what to do, which is leading to a flight to quality."

    Blaige described the packaging market as "a silver lining" during the crisis, with March sales at some firms that he's working with up 30-50 percent.

    Travel restrictions also are playing a role in deal deadlines.

    "People are trying to do virtual plant tours, but they still want to kick the tires," Blaige said.

    "Even if the economy reopens in a month or two, companies are going to need some time to reestablish their numbers, whether they're buying or selling," he added. "Private equity companies might be looking for bargains. Add-on acquisitions of companies with annual sales of $5 million to $50 million might be easier to do."

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