Plastics M&A riding first-half wave, looks to continue for rest of 2021

Like an impatient thoroughbred racehorse, the plastics M&A market bolted from the gate in 2021, as many parts of the world began to reopen from the COVID-19 pandemic.

"The growth we saw in the first few months can be attributed to holdovers from 2020," said John Hart, managing director with P&M Corporate Finance in Southfield, Mich. "But the deals we're seeing now are true 2021 deals. People are saying, 'The market looks good, so let's go.'"

Plastics and packaging deal volume boomed from 118 deals in the first half of 2020 to 211 in the same period in 2021 — a jump of almost 80 percent, according to PMCF data. The months of April and May — months when the world was in contraction in 2020 — saw major surges in 2021. In that comparison, the number of April deals went from 11 to 36 (up 227 percent) and the number of May deals trampolined from six to 40 (up 566 percent).

Among end markets, major first-half growth was seen in food and beverage (up 185 percent from 13 to 37) and automotive and transportation (up 225 percent from 12 to 39). Strong first-half sector growth was seen in film (up 255 percent from 11 to 39) and injection molding (up 103 percent from 32 to 65).

Based on product segment, leading first-half growth areas were flexible packaging (up 275 percent from 8 to 30) and custom molding (up 163 percent from 24 to 63).

The number of first-half deals involving private equity firms more than doubled, going from 47 to 96. Private equity's share of total deals increased from 40 percent to 45 percent for the half. Geographically, the plastics and packaging M&A market became more global in the first half, with the percentage of U.S.-only deals decreasing from 40 to 35.

Financial pros contacted for this story all saw a percolating market for plastics M&A in the first half, due in part to several years of strong activity being put on hold by the pandemic. Many plastics sectors have picked up where they left off after the challenges of the pandemic.

"There were a lot of early deals; the market had been cooking for a while," said Jim Berklas, owner of Augmented Industry Services in Farmington, Conn. "Good companies are coming onto the market and trading at high multiples. We're starting to see some deals with multiples in the mid-teens."

"There's a lot of institutional money out there," added Andrew Munson, a partner with MBS Advisors in Florence, Mass. "That's been a macrotrend of the last 10 or 20 years, but in the last year, it's become more overheated."

Part of the market recovery also has come from people adjusting to the reality of the pandemic, according to Rick Weil, managing director with Mesirow Financial in Chicago. "This time last year, people began to see that the world wasn't falling apart and that plastics and packaging companies were doing pretty well," he said. "Things started to pick up in June and a lot of companies ended up having record performances."

Buyers of plastics firms "have been very active and aggressive, in particular in private equity," said Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee. "[PE firms] had been focused on their existing portfolios, but now they're looking for more deals."

Plastics M&A activity "is off the charts now," according to David Evatz, managing director with Stout Investment Banking in Chicago. According to Stout data, the market had been averaging 90-100 deals per quarter in recent years but racked up 118 in the first quarter of 2021 and was on track to record 120 in the second quarter.

"Companies that have performed well in the last two years are out there," said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. "On the strategic side, public firms are flush with cash."

The market also has worked through leftover inventory of deals from 2020, according to Andrew Petryk, managing director with Brown Gibbons Lang in Cleveland. "What can be sold is being sold now in new deals."

One major issue affecting the plastics M&A market in 2021 is the possibility of the U.S. government increasing the capital gains tax rate from 20 percent to 39.6 percent. This proposal is not yet in place — and could be reduced when passed — but it's got the attention of plastics owners, whether they're financial firms or longtime owners looking at retirement.

"We're seeing a number of business owners who might want to sell sooner than later; they're not waiting for the tax increase," said Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Foxfire, N.C.

"The big driver today is family-owned firms getting ahead of capital gains taxes," added Weil at Mesirow. "They've made it through COVID and their businesses are doing well, but some owners are tired. Usually, if you've been contemplating a sale for some time, capital gains can be a catalyst in deciding to sell."

Capital gains "is a factor," said Matt Miller, managing director of BlueWater Partners LLC in Grand Rapids, Mich. "It's driving a lot of [private equity] groups to seek exits. And private owners who had been thinking about timing and their plans might want to sell now."

Complicating the issue is the possibility that the increase could be retroactive to April of this year, meaning owners might have to pay the higher rate even if they sell before the end of 2021. Several pros said this scenario isn't likely, but it can't be ruled out.

"It's a reality check for owners, but if it's retroactive, there might not be a race to get deals done by the end of the year," Blaige said.

"There's a lot of uncertainty regarding changes in capital gains taxes," added Phil Karig, managing director with Mathelin Bay Associates in St. Louis. "There's at least a possibility that the increase might not apply to 2021 sales."

Sellers looking to sell in advance of the increase also might be pushed by buyers to take a lower price just to get a deal done.

"Every buyer is looking to leverage capital gains to their advantage or to get a deal done quickly," said Peter Schmitt, managing director at Montesino Associates LLC in Wilmington, Del. "It gives leverage to both sides.

"If you ask an owner today, they want to know what's going to happen in the next five years, how long will multiples remain high and how much can they hang onto when they sell their firm," Schmitt said.

Regardless of the impact, discussions of capital gains aren't going away anytime soon.

"We expect to see another surge in the second half because of capital gains," PMCF's Hart said. "Market conditions are strong for sellers. We've been contacted by some who want to get a deal done this year to avoid a capital gains hit."

"There's going to be a big impact from capital gains," said Petryk at BGL. "As soon as the election results were in, we told our clients they had to think about a different tax structure.

"There are a lot of decisions for sellers to work through, but we're telling our clients they might not see a more favorable tax structure or higher multiples than they are today," he added.

Private owners and family owners "have done the math and they realize the tax rate could be significant," Grace Matthews' Hinz said. "It could cause a lot of business owners to think hard about a potential sale."

For a lot of owners, the amount they get from a sale "is their family's whole retirement," added Munson at MBS. "Taxes can have a big impact on that."

Even as plastics firms work to put COVID in their rearview mirrors, the pandemic continues to have an impact, particularly on how it affects the process of evaluating a company for sale. Depending on end markets, some companies flourished during COVID, while others struggled.

"Part of the problem, even going into COVID, was how hard it was to determine a company's real level of profitability," PTA's Ridenour said. "COVID has made that more challenging."

Firms are using various evaluation strategies, including using the 12 months through the end of June for a comparison, using 2019 results or even omitting the second quarter of 2020, when pandemic impact was at its highest level.

"COVID is pushing buyers to be more creative with earnouts and other strategies," said Berklas at AIS. Munson at MBS added that "whether COVID's impact was good or bad, you have to put an asterisk next to 2020."

"Every company and transaction is different," said Matt Yohe at MBE Partners of Cleveland. "Plenty of companies clearly had an unprecedented rise in demand, like if you were selling into the grocery market. But others, like those selling into restaurants, were down. The economy going forward is going to be different than before."

"Everyone is assessing whether they had a COVID bump," Mesirow's Weil said. "Did their business surge then normalize? What does that look like?"

At Grace Matthews, Hinz said that "we're now at the point of being more than a year past the start of COVID. … Companies are starting to clean themselves up for due diligence. … Buyers want to see their true run rate so they can try and get a handle on their business."

COVID-based challenges to evaluations, according to Evatz at Stout, include underperforming companies possibly not wanting to sell because they had a down year. Outperforming companies, on the other hand, might want to sell, but buyers want to know how much of their performance was because of COVID.

"There were a lot of big COVID bumps last summer, but that's mostly over now," Blaige said. "Now buyers are looking at things like inflation and the impact of higher resin prices."

COVID "was a wake-up call" for many plastic business owners, according to Hart at PMCF.

"If you had been saying you'd think about selling in five years or later, now you're changing your game plan and pursuing a deal," he said. "COVID is the new dynamic. It's part of every buyer's discussion. Did your company have a surge or the opposite? It can be a factor in a number of different ways."

For Mathelin Bay, Karig said that multiple plastics end markets — including personal protective equipment — saw "very large and often unusual spikes in demand" starting in March 2020. "Though there are likely to be some ongoing residual effects … going forward there are already indications that many markets are quickly reverting to normal," he added.

"With the return to more normal demand, buyers of plastics processors have less risk that they'll value companies based on unusual and nonrepeating sales figures."

Even as markets recover, evaluations could be a challenge for the rest of 2021. "There were winners and losers from COVID, and that's slowed the sale process down for some companies," BlueWater's Miller said. "Some companies are just trying to build a bridge from 2019 to 2021."

Prior to the pandemic, sustainability, including recycling, circular economies and carbon footprints, was becoming a larger focus for many plastics firms. It receded during the pandemic — as companies worked to keep their doors open — but has returned to some extent in 2021.

"Even if investors aren't asking about sustainability, the banks lending to them are," Blaige said. "They want to know what plastics companies are doing in that area."

"ESG [environmental, social, governance] is a trend that's building momentum, but I haven't seen any real impact yet," said Miller at BlueWater.

PMCF's Hart said that sustainability "has come back really strong. … It seems like single-use packaging has a target on its back."

"If a company is smart and has a good story to tell on sustainability, they might do better," said Schmitt at Montesino. "Sustainability isn't killing packaging, but it's transforming it. If you have a good sustainability program, you might get a premium in a sale."

Recycling and sustainability "are the direction the market is going in," according to Hinz at Grace Matthews. Yohe at MBE added that "society is putting a high emphasis on sustainability."

At MBS, Munson said that "most people understand that plastics are necessary, but there's still more concern about sustainability than there was before."

As the plastics M&A market moves into the second half of 2021, most pros contacted for this story believe the market can keep its momentum going. Deal volume should exceed that of 2020 — when the number of deals was down 15 percent — and has the potential to surpass 2019 as well.

"My gut says that we'll get back to 2019 or more," said Berklas at AIS. The market isn't seeing a slowdown as of yet, MBE's Yohe added, although inflation and higher costs for raw materials and labor could be a challenge in the second half. "It's still a good lending environment," he said. "Interest rates are low and debt availability remains high."

Mesirow "has been pleasantly surprised by valuations," according to Weil. "Things should be busy for the remainder of the year," he said.

"We're not seeing much indication that multiples will go down, although on the whole there are fewer high-quality assets available," said Hinz at Grace Matthews. Many private equity firms "are still flush with cash — and they can't leave it in treasury notes forever," Montesino's Schmitt added.

Valuations in general "are at or near all-time highs and will continue to be for the balance of the year," said Evatz at Stout. "Medical and packaging are still in demand — even on the industrial side, auto and appliance are in demand. We expect to see more activity there."

"A typical plastics company isn't getting 10 times earnings for a purchase price," Blaige said. "But valuations should remain high and deal volume should be up at least 10 percent vs. 2020."

2021 thus far has featured "high multiples and good economic conditions," said Hart at PMCF.

"Now, buyers are turning on the spigot and then some," he added. "It's almost unbelievable to see this market vs. what it was like a year ago."

The rest of the year for plastics M&A should see "buyers of all sorts — private equity, strategic, family offices," BGL's Petryk added. "This is a great time to be a seller."