M&A market pullback opens opportunity for 'strategic' investors in packaging

Schaumburg, Ill. — Plastic packaging company valuations are not what they have been in recent times, but they are still better than what they have been.

"I would say the packaging market still remains very en vogue with investors, both strategic investors as well as the private equity community," said Brian Flynn, a director for Chicago-based investment firm William Blair.

Flynn examined the current market conditions for buyers and sellers during a presentation at the recent Plastics Caps & Closures 2022 conference organized by Plastics News in Schaumburg. He also spoke about trends in a separate interview.

Strategic buyers are those already in the packaging business that are looking to expand, while private equity firms are typically looking to buy and hold for a period before cashing out and taking profits.

While values being paid for companies are off from high-water marks before the economic downturn, they still remain more robust than what was historically paid before a run-up in recent years.

In the world of mergers and acquisitions, there is no more important word to a buyer or a seller than "multiples." These are multiples of yearly earnings that value a company's worth to those wanting to make a deal.

Generally speaking, private equity firms are seen as being willing to pay higher multiples for companies than strategic buyers. That's because private equity firms have cash they need to deploy in an effort to make money for investors. Those already in the business typically look at their ability to fund purchases more conservatively as they manage their cash flow and can take a longer view.

There was a time when multiples were routinely in the range of five, six or seven times earnings before an abundance of private equity money in recent years drove up prices routinely above 10 times earnings.

So-called "cheap money" — financing with low interest rates — has helped fuel the buying spree. But recent moves by the Federal Reserve to hike interest rates have cooled the market.

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"I think it's broader M&A than packaging-specific. It's broader markets overall," Flynn said about the downturn. "But the market in packaging has shown a lot of resiliency."

That is because plastic packaging firms tend to be recession-resistant. People still need food- and health care-related packaging, for example, regardless of what the economy is doing.

"Packaging investments tend to do better than other investments in other markets, right?" Flynn said. "So I think the demand for packaging will stay strong. But you could see some valuation pressure in the near-term future as a result of financing markets just pulling back."

In this period of increasing interest rates, lending institutions are being burned by deals they agreed to finance when rates were lower. Increasing rates between the time they are locked in by borrowers and when the cash actually gets deployed are causing lending institutions to lose money, Flynn said.

The market has to work through this current period of loss, as interest rates continue to rise, before lenders will be willing to jump back into finance deals.

"It's more expensive to borrow money, so it's putting pressure on it. But also the banks, the lending institutions, are being more conservative as well due to a lot of losses they've taken recently on pieces of paper they wrote," he said. "But also on upcoming losses.

"Packaging M&A still will be active. Will it be the high-flying multiples of before? Probably not," he said. But he also does not see multiples going down significantly. This dip in valuations is opening up an opportunity for strategic buyers — again, those who are already in the business — to make, well, strategic moves for their businesses.

While there's been a slowdown in recent merger and acquisition strategy, Flynn said, there is a pent-up demand that eventually will have to be satisfied. "Looking at the buyer community overall, there still is a lot of capital on the sideline," he said.

Investors ultimately will do what they do — and that's invest.

A company's sustainability efforts also can have an impact on valuation, the director told the conference crowd.

"Overall packaging sustainability trends: Consumers are highly concerned on it and the quantity and complexity of the regulations are making it more of a focus and why I think it's really interesting for packaging M&A. Three, four five years ago, it was a question we receive right before we signed a transaction, typically from some lawyer. And it was the obligatory question of, 'Do you care about packaging sustainability?' We always said 'yes,' and that was the end of the due diligence questions," he explained.

Now there are deep dives into sustainability efforts as part of the sales process. "Folks who do not have a strategy and that do not have an active focus on sustainability are seeing valuation discounts actually and penalties within the M&A context," Flynn said.

Another factor in today's M&A market is that buyers now are limiting the number of deals they look at during any given time.

"In the past you would see buyers in multiple processes at one time, looking at several deals at once," he said. "Now it's much more of a binary decision."

Investors have a lot on their plates these days, including having to deal with inflation, labor shortages and raw material costs with their existing companies. That leaves less focus on potential deals. "There's a lot going on right now," Flynn said.