The plastics mergers and acquisitions market is recovering from the COVID-19 pandemic, but it might take a while to reach its previous levels.
Executives with Chicago-based financial firms Mesirow Financial and Stout covered these topics recently in webinars hosted by Plastics News. M&A deal volume in plastics and other sectors has declined in 2020, as uncertainties about financial results, the inability to meet face to face and other factors have prevented deals from closing.
Mesirow Managing Director Rick Weil said that U.S. GDP is expected to be down 6 percent in 2020 but up 5.5 percent in 2021, according to a report from financial firm Goldman Sachs. He also pointed out that in some past pandemics dating back to 1964, U.S. stock market performance improved within six months.
In 2020, Weil said that the U.S. already has seen "significant government intervention in rebuilding the economy."
"Multiples are down from the peak, but a strong recovery is taking place," he added. "Some deals were pulled from the market, and that was the right thing to do at the time, since companies were dealing with other issues and weren't focused on M&A."
The near-term outlook remains challenging for some firms, according to Mesirow Managing Director Louis Mitchell, as they focus on internal issues and make sure that their employees and customers are taken care of.
Financing for deals in some cases also has been more difficult to attain, he added, and fewer in-person meetings have put some M&A activity "on pause."
Some plastics M&A deals that were started before the pandemic and that make strategic sense shouldn't see a reduction in value, Mitchell explained. "Over the long term, the outlook [for plastics M&A] is still very positive," he said. "There's a lot of private equity money chasing transactions."
Some plastics sectors, such as packaging for over-the-counter pharmaceuticals, have done well during the pandemic, according to Weil. He added that packaging for in-home deliveries also has been a growth area.
"There are a lot of Amazon and FedEx trucks out there using a lot of flexible mailers and thermoformed containers," he said.
Plastics M&A deal volume should improve as 2020 goes on, Mitchell said, but it might not approach the record-high levels of 2019. Valuations also should return close to previous levels as people "go back to work and back to business," he said.
Mesirow officials also said that capital markets will need to re-open more and banks will need to start lending again for M&A activity to resume at a more normal level. They added that online video meetings have been helpful and that some clients are preparing marketing materials in anticipation of future deals.
"I think some might wait a couple months just to get a more clear picture of the market," Mitchell said. "They're working with their advisers to be ready. M&A is still looked at as a viable way to grow a company."
Weil added that the U.S. remains "a very resilient country and economy with a big economic engine."
"There may be short-term pain and uncertainty, but the U.S. is still a great place to invest," he said.
Officials with Stout focused on liquidity and options for plastics firms that might be struggling during the COVID-19 slowdown.
"There could be defaults and bankruptcies in the second quarter," Managing Director Mike Krakovsky said. "We're also seeing some significant concessions from lenders and landlords, as well as refinancing and releveraging."
Partial asset sales are an option for companies facing challenges. "You don't want to wait too long and run out of options," Krakovsky added.
Plastics firms can manage liquidity challenges by doing comprehensive due diligence and developing a range of strategic alternatives, according to Stout Managing Director John Baumgartner. He also encouraged businesses to "maintain cash — hold on to it as long as you can."
Stout Managing Director Mike Benson said that firms selling into the automotive and construction markets have been affected by the downturn more than other firms. He added that these firms' ability to conserve cash will play a role in how they emerge from the downturn.
Companies with cash also could have buying opportunities during the downturn, Krakovsky said. Communication with lenders also is important in challenging times.
"Explain what happened and what you plan to do about it," Baumgartner said. "Show how that can benefit the lender and lead to an eventual recovery." Taking partial payments from customers also can allow plastics firms "to keep inventory moving," he added.