Plastics M&A market white-hot entering 2022

Even during a multiyear wave of strong plastics M&A activity, 2021 stood out.

To put it in perspective, the year was almost like seeing a herd of unicorns in a field of four-leaf clovers.

"It was unlike anything I've ever seen," said John Hart, managing director at P&M Corporate Finance in Southfield, Mich. "The whole year was extremely active, but the fourth quarter really catapulted it to the next level. It was mayhem there at the end with so many deals closing."

For full-year 2021, PMCF tracked 485 plastics M&A deals. That's a jump of almost 75 percent vs. 2020 and the highest total recorded since the firm began tracking those deals more than 15 years ago. Of those 485 deals, 147 — more than 30 percent — closed in the final three months of the year.

The second-half deal total of 268 was up almost 24 percent vs. the first half. Fourth-quarter deal totals grew more than 20 percent over the third quarter.

Hart and other financial pros recently contacted by Plastics News identified a few key factors that supercharged plastics M&A in 2021. A strong appetite for plastics acquisitions continued from both strategic buyers already in the industry as well as from private equity firms. At the same time, 2021 benefited from some deals being delayed from 2020 because of reasons related to COVID-19, while some deals were pulled forward from 2022 as sellers tried to avoid potential higher capital gains taxes.

"There was a run of strong sellers in the market, with high multiples being paid and lots of buyers," Hart said.

Mesirow Financial of Chicago closed six plastics deals in December. "More so than in prior years, there was a rush to get deals done because of expectations of higher capital gains taxes in 2022," Managing Director Rick Weil said. "But now it looks like that's off the table because of gridlock in Washington.

"A lot of our clients are family companies, and they said that 2021 was the year they wanted to sell," he added.

Matt Miller, managing director of BlueWater Partners LLC in Grand Rapids, Mich., agreed that the second half was very strong for plastics M&A.

"There was a lot of pent-up demand caused by COVID," Miller said. "Now companies are trying to figure out how to sustain sales they may have gained from COVID. If you're a seller, you're asking how much longer do you want to wait."

Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago, differed a bit from other financial pros by saying that he thinks the current M&A market "is at the top of the cycle" and could face some challenges in 2022.

"A lot of businesses have made it through some hard times these last few years but have bounced back and might want to sell before the market heads down again," he said. "It's like a boxer getting punched in the nose and knocked down in the middle of the ring. You've got to get back up or lose the fight."

End markets seeing big gains in deal volume in 2021, according to PMCF data, included industrial, with 79 more deals than the year before, and food and beverage, with 48 more. Based on sector, the plastic film market saw a year-over-year gain of 55 deals, with injection molding up by 48. In product segments, industrial saw 58 more deals and flexible packaging saw 48 more deals.

"In general, the packaging industry benefited from COVID for several reasons, including e-commerce and online shopping," Hart said.

Automotive injection molders struggled in 2021 because of semiconductor shortages, according to Bill Ridenour, president of Polymer Transaction Advisors Inc. in Foxfire, N.C., but packaging companies and recyclers are doing well.

In 2022, plastics firms in the building and construction market could benefit from increased infrastructure spending, said Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. Those firms were impacted in 2020 by supply chain issues for PVC resin and other materials.

Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee, added that plastics packaging has benefited from the economy switching more to goods than services. "It had been the other way around, but COVID flipped that," he said.

Matt Yohe with investment firm MBE Partners in Cleveland agreed, saying that the U.S. market has seen "an in-person services slowdown but a booming market for durable goods."

Medical plastic packaging markets also are gaining in spite of concerns about sustainability, according to Peter Schmitt, managing director at Montesino Associates LLC in Wilmington, Del. "The type of packaging is of secondary importance to health," he said.

Sustainability is driving interest in plastics deals in other areas, said Phil Karig, managing director with Mathelin Bay Associates in St. Louis.

"There's no limit in interest in recycling and sustainability plays," he added. "They're attractive internationally. … Companies can work on the environment or plastics space driven by big brands wanting to reduce their carbon footprint."

Medical and plastics packaging firms "are highly coveted, but there's a scarcity level there," according to David Evatz, managing director with Stout Investment Banking in Chicago. Stout data also shows 2021 as the best year for plastics M&A going back many years. The firm tracked 522 deals in 2021, up more than 40 percent vs. 2020. Packaging accounted for 52 percent of the 2021 deals tracked by Stout.

The share of plastics M&A deals involving private equity firms increased from 41 percent in 2020 to 47 percent in 2021, according to PMCF data. This has led to some speculation that strategic buyers might be getting priced out of the market, as many PE firms have extremely deep pockets.

Private equity "is still in the market pretty heavily; they've got money to burn," said Ridenour at PTA. "It seems like strategics have backed off a little bit."

"PE has shaped a lot of packaging markets," Mesirow's Weil said. PE firms "buy and build; they like stability. … They invest in [packaging]. They see value in it."

BGL's Petryk didn't buy into the idea of PE discouraging strategic buyers. "Strategics are very selective and they have a defined strategy," he said. "They can compete tooth and nail with PE."

At Grace Matthews, Hinz said he sees "a healthy mix" of PE and strategic buyers in deals. Blaige compared PE buyers to "the conglomerates of 30 years ago — they'll buy anything in their way."

"Private equity makes value by adding pieces to the pie from other pies," said Schmitt at Montesino. "Strategics say, 'Let's make the pie bigger.'" Evatz pointed out that although strategic buyers are "more focused," they're outnumbered by PE buyers.

Karig added that PE buyers "have the advantage of having a lot of cash available, but strategics have more opportunity to drive cost out of a business."

"They might have the same equipment as a company they're acquiring, or they can find other ways to cut costs. Strategics are still involved," Karig said.

MPE's Yohe can confirm that, since his firm recently sold injection molder Plastic Components Inc. of Germantown, Wis., to Rosti Group AB, a larger injection molder based in Malmo, Sweden.

"PCI is a great business that drew a lot of interest, and we were pleased with the result," he said. "If a strategic has a desire for a market or geography, they'll make a good offer."

And some strategic buyers are playing the long game.

"I've talked to a number of strategics who have lost deals to private equity," said Hart at PMCF. "Their feedback is that they're disappointed, but they'll be there when private equity sells in a few years."

A potential federal capital gains tax increase, which could have increased from 20 percent to almost 40 percent, no longer looks likely. But buyers and sellers could be affected by higher interest rates in 2022.

Interest rates have been historically low for several years, but inflation could lead to three or four quarter-point increases this year, according to market reports. With few exceptions, the Federal Funds Rate has been under 2 percent since 2008. For much of that time, the rate was under 1 percent.

For the most part, financial pros interviewed by PN didn't expect higher interest rates to have much short-term impact on plastics M&A deal volume, but that could change over a longer period of time.

"Over time, higher interest rates do tend to have an impact on M&A activity due to higher lending costs and potential constraints on economic activity," Grace Matthews' Hinz said. "Over the medium term, upward pressure on rates could impact M&A to some extent. But with rates as low as they are, my view is that it will take some time — and likely not in 2022 — before it really starts to have an impact."

Higher interest rates "simply increase the cost of capital," added Andrew Munson, a partner at MBS Advisors in Florence, Mass. "So it can have impacts on all sorts of spending, including capital spending on equipment and plant expansions and such. … Rising rates can increase private equity holding periods and reduce the amount of institutional money committed to private equity. But these impacts are likely to be very incremental, since the rate hikes they are talking about are not terribly sudden or dramatic."

"I wouldn't expect interest rate increases to more than marginally affect M&A activity over the next year, mainly because the starting level of interest rates is low by historical standards," Karig said.

But he added that if higher rates start to affect the overall economy and slows business for plastics processors, that "could convince some sellers to postpone selling their companies until their earnings begin to recover."

One potential impact of higher interest rates could be lower valuations for plastics firms being sold because of higher borrowing costs. "On the margin, buyers may likely revise valuations lower to account for the higher cost of financing their deals," said Weil at Mesirow.

Ridenour expressed concern that higher interest rates combined with potential higher capital gains taxes "could be disastrous" for plastics M&A. "My clients speak to me regularly about this and are very concerned as business owners," he said.

"Interest rates are still low overall," Stout's Evatz added. "Higher rates shouldn't impact buyer interest, but they could affect valuations a little."

Higher rates could have more impact, according to Blaige, if "bank underwriters get nervous about a choppy or down economic outlook, credit tightens and a flight to quality occurs in which fewer buyout loans get approved." The result, he said, would "decrease both valuations and demand for private equity driven deals, both platform and add on."

Inflation — which, at almost 5 percent for full-year 2021, is the highest seen in the U.S. in more than 20 years — also could affect plastics M&A, but it shouldn't dampen overall deal volume.

"Inflation in the supply chain increases the costs of raw materials and the cost of making products," Hinz said. "That could affect the ability to evaluate a company.

Ongoing high inflation "will lead buyers to return to their spreadsheets in evaluating companies to see if they can pass on price increases," Schmitt added.

Both inflation and higher interest rates "make capital more expensive, but they're not going to bring the [M&A] market to a screeching halt," said Miller.

The ongoing challenges of COVID-19, the labor market and supply chain issues may be convincing some business owners to sell earlier than they would have prior to 2020. Higher valuations are playing a role as well.

"I think some owners are looking at the market and saying, 'If I can get 13-14 times [earnings] for my company, I'm gonna roll the dice,'" Montesino's Schmitt said.

"COVID has caused some owners to reevaluate their decisions," said Munson at MBS. "They're afraid what happened in 2020 could happen again, and some of them are saying life's too short."

Blaige pointed out that some of his clients "have had more time to think about their future plans" because of COVID and are open to selling sooner. Some Grace Matthews clients "took vacations or didn't travel as much or spent time at home" during COVID, leading some to consider offers.

Some owners "are tired and want out," according to Weil at Mesirow. "They're having a hard time getting workers; they can't get trucks for deliveries and are facing other challenges."

"There could be some COVID fatigue among buyers," Evatz said. "Labor has been a big challenge."

"Any event like COVID shows people that they're not invincible," PMCF's Hart added. "It makes them want to have a plan in place."

In spite of some challenges, plastics M&A is on a roll that should continue into 2022 — even if the high deal totals of 2021 will be hard to repeat.

"I can't see us matching 2021," PMCF's Hart said. "There aren't enough sellers, but we expect a strong year overall. It could be higher than 2020."

Petryk said that BGL "has the same enthusiasm for 2022 that we had for 2021." Grace Matthews "doesn't see any signs of the market slowing down in 2022 or in the foreseeable future," Hinz added.

"[2022] might not be as strong as 2021," according to Evatz. "It should be a more normalized year; we're not expecting a slowdown."

Even as he predicts the market will peak, Blaige said that he expects strong deal volume in 2022, as sellers make their moves before multiples start to decline.

"We could see some regression to the mean because of all the deals done at the end of 2021, but nothing should impact the market at a level that would slow it down," Karig said.

"Barring a black swan event, M&A will do just fine," Schmitt added.