Will the industry see more M&A deals in 2020? Expect the unexpected

The wild ride of plastics mergers and acquisitions continued in the second half of 2019 — and 2020 might follow similar curves.

Total plastics and packaging deal volume registered 168 deals for the half, only one deal less than the first half, according to P&M Corporate Finance in Southfield, Mich. Total volume for 2019 checked in at 337, down 10 from 2018.

Based on end market, automotive/transportation posted the most growth for full-year 2019, climbing by 17 deals for a 74 percent hike. Construction deals also grew by 12, an increase of 50 percent.

Specialty deals — including rotational molding, foam, pipe/tube, profile extrusion and composites — led 2019 sector growth, increasing by 18 deals, a 28 percent boost. Injection molding deals also surged 20 percent with 17 additional deals.

In product segments, custom molding deals grew by 21 for a 70 percent increase. Solid growth also was seen in building products, up 42 percent thanks to 11 more deals.

Although fourth-quarter deal volume was "a little light," according to PMCF Managing Director John Hart, it was in line with the second quarter.

"The third quarter was strong, with high levels of activity and a lot of add-on growth," he said. "If you're a seller without a good succession plan, it might be better to sell to a strategic add-on. They already have infrastructure in place and can provide a path to retirement.

"Private equity has had a major impact on plastics and packaging M&A, and within private equity, there's been a big shift from platform to add-on."

Private equity buyers remained strong in 2019 — involved in 45 percent of deals — but Peter Schmitt, managing director of Montesino Associates LLC in Wilmington, Del., said that because of peak multiples, PE firms "have begun to reexamine the model" for investing in plastics and packaging.

"From a buyer standpoint, there's still a large number of [PE] buyers out there, even if we haven't seen an uptick in valuations," Andrew Petryk, managing director at Brown Gibbons Lang in Cleveland, said. "That level of interest held strong throughout the year and we see that continuing into 2020."

Phil Karig, managing director of Mathelin Bay Associates in St. Louis, added that "there's still a lot of [PE] money out there … and there doesn't appear to be an end to that anytime soon."

PE firms "are getting a little more sophisticated" in putting together platforms that have "the gunpowder of PE and the expertise of strategic," Karig said.

Strategic buyers "have been pretty active overall, but PE buyers also have been very successful and equity markets have been strong," according to Matt Yohe, a partner with MPE Partners in Cleveland.

"For a good chunk of 2019, PE companies were winning vs. strategics," Rick Weil, managing director with Mesirow Financial in Chicago, said. "Financial buyers were as active as ever on valuations and they've become more disciplined to what to be excited about. They used to throw money at anything, but now that's not the case. If an acquisition target has great margins, they'll get a big price."

Stout Investment Banking of Chicago showed a slight decline in plastics and packaging deals for 2019, but managing director David Evatz said the market was still very strong for both strategic and financial buyers.

For deal volume, 2019 "was in the same ballpark" as 2018, according to Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago.

"There are a lot of serial acquirers out there, but some PE firms are getting really finicky," he said. "Strategics have been more reliable. A PE company signing a letter of intent isn't necessarily a sign of closing a deal."

PE "has never had more money to invest than they do now, but valuations are higher," Tim Burns, senior adviser of Cranial Capital in Solon, Ohio, said. "Six to eight times EBITDA was the old range, but now it's 8-10 for packaging," he added. "Even vagabond companies can sell in the mid teens. And corporate buyers have suffered because they can't chase deals like PE does. But in some cases they can still push out PE if they're big enough."

Most packaging markets remain attractive to buyers, except for isolated cases such as foam trays or health and beauty bottles sold to hotels, Blaige said.

The automotive market "has been at a peak for a year, if not two, and I think buyers built that into their analysis in 2018 and 2019," said Evatz at Stout. He added that although auto "is expected to trend down," vehicles could be using a higher percentage of plastic parts and could remain attractive to buyers as a result. Flexible packaging firms also "have shown a lot of innovation," Evatz said.

Plastics buyers also are looking for injection molding businesses that own their own molds and products, as opposed to custom molders, according to Bill Ridenour, owner of Polymer Transaction Advisors in Foxfire, N.C. "Molders can get higher profits from proprietary products," he added.

MBS Advisors of Florence, Mass., closed several deals in 2019 and saw a variety of interest in medical and other markets, according to President Jonathan Soucy.

"There was a little bit of hesitation in auto because of the slowdown, but the market was still strong overall," he said.

At Mesirow, Weil listed health care, foodservice, consumer packaging and personal care as solid markets. Retail packaging in bags and boxes has been challenged because of the trend toward e-commerce and away from traditional retail, he said.

Yohe said there's still room for plastic conversions in industrial markets, although MPE "is cautious on the automotive cycle." BGL worked with companies in auto, general industrial and building products in 2019, all of which "had reasonably good performance," Petryk said.

"When you're in higher-margin medical and packaging, you can still get a high single-digit or low double-digit valuation," he added.

Concerns about the image of plastics — ranging from marine pollution to bans on bags or other single-use items — have played a role in M&A discussions in the last year. Those concerns look to continue in 2020.

"Will the plastic market keep growing?" asked Schmitt at Montesino. "There's uncertainty about plastics and a growing emotional feeling about changing to glass or metal, even though that would be a disaster for environment, and I'm not even sure if it can be done."

"There's definitely some negative sentiment toward plastics," PMCF's Hart said. "If you're talking to a PE platform, one of the first questions they ask is how much recycled content do you use and what you're your plans to go forward. Companies without sustainability plans are disadvantaged."

M&A market watchers said industrial plastics firms haven't been affected as much by these concerns. "There's been some falloff in single use, but packaging and medical have been the two best markets for molding businesses, and those aren't going away," MBS Chairman Terry Minnick said.

"If your whole business was bags or straws or [auto industry] sedans, you'd be in trouble," added Soucy at MBS. "But if you're making parts for the F-150 or electric vehicles, you're OK."

At the same time, Burns at Cranial Capital said that "it's hard to tell if there's been a negative impact."

"Right now it seems like the industry is in a lull phase where all these companies are joining groups for sustainability," he added. "But the real thing plastic has going for it is what are the alternatives? Then you're back to talking about glass and metal and folding cartons."

With an increased focus on sustainability, and major consumer brands wanting more recycled content, increased M&A interest in recycling might be expected. But M&A pros had different responses on that topic.

"There's more interest in recycling, especially in the PET space, as big buyers drive to recycled content," Karig at Mathelin Bay said. Ridenour agreed, saying that recycling "could be a very hot market" and that interest in recycling is causing some buyers to consider which resins can be recycled before making an investment.

Hart added that PMCF has seen more interest in recycling deals than in past years, and that higher level should continue into 2020.

"People are investing in recycling assets or looking to present alternate materials," he said.

But the recycling market still has its doubters. "The economy around recycling makes it challenging," Weil said. "It's hard to ask people to pay more for recycled material."

MBS hasn't seen much interest in recycling deals, according to Soucy. Blaige also hasn't fielded many recycling inquiries.

"When virgin resin prices are as low as they are, it's hard to get people to talk about recycled," he said.

Plastics M&A pros spend a lot of time assessing the mental outlooks of plastics business owners. Do they want to sell? Why? Why not? And when?

"Right now, we're really not seeing buyers holding on to get a better price," said Yohe at MPE. "It's been a good market for sellers for several years in a row."

"The decision to sell is usually based on owner-specific reasons like estate planning or other goals," he added. "The timing has to be right."

Typically, if a business owner's not ready to sell, it's because of "a soft patch in earnings or they just bought new equipment or a personal situation," Weil said.

"They have a lot at stake in the business but there might not be a son or daughter or next generation to hand the business off to," he added. "And because the market's been so good, every business owner is getting called on."

With multiples at all-time highs, "an additional layer of sellers has come out to take advantage," added PTA's Ridenour.

"Some are looking to sell before they normally would," he said. "They're seeing the business cycle in growth mode for 10 years, and logic dictates there will be a recession. It's hard to find new businesses to invest in and they want to safeguard their estate."

Ridenour added sellers don't necessarily always sell to the highest bidder. "Good sellers make their evaluation based on price, payment, financing and the long-term plans of the buyer, including their plans for the company's employees," he said.

Although some business owners think that earnings could continue to grow through 2020, signs of a downturn are increasing, according to Blaige. "An owner might want to get record earnings, but we're in the 10th or 11th year of this business cycle," he said.

"Generally, sellers understand that valuations are resulting in maximum value at this point," Evatz said.

Even as plastics M&A deal volume is expected to remain solid in 2020, the year also has some unpredictable variables, including the U.S. presidential election and other economic and geopolitical issues.

"The elephant in the room is November," said Soucy at MBS, referring to the election.

"We don't expect any change in the first half of 2020," PMCF's Hart added. "The fundamentals are there and the amount of capital chasing deals is there. Unless there are major economic or geopolitical events, we should see more of the same."

Petryk at BGL said that "in an election year, you can add some unknowns."

"It's going to be interesting," he said. "But we expect the strong market of 2019 to carry into 2020 unless the world stage gets too unpredictable."

Plastics M&A should be strong in 2020, according to Karig, unless "the economy tops out and people look to get out of investments." An election year "is always a milestone evwent, but we don't see any reason to expect a slowdown," said Yohe at MPE.

Even if an economic downturn takes place, Evatz said discretionary spending will be more impacted than spending on medical and packaging. "I think we'll be strong through the summer, then the market will react to the election," he added.

Weil at Mesirow and Burns at Cranial Capital both said that 2020 plastics M&A might eventually be judged by its comparison to 2019.

"If 2020 is on par with 2019, that's a big win," Weil said. "The market's record of growth should lend some comfort."

And 2020 "could be what you don't expect," Burns added. "It might not be a run and gun market, but it still could do more than 2019. If we can sustain at this level, that's pretty good."