Trends in Packaging M&A

There are several themes that are dominating today's mergers and acquisition (M&A) marketplace. The most prevalent theme is the use of M&A to expand the global footprint of the buyer. Packaging companies are finding it easier to buy their way into geographic expansion rather than build their way. Chart 1 highlights some recent M&A activity that has resulted in significant geographic expansion for the acquirer.

It is interesting to note that the majority of the global expansion transactions took place in emerging markets. Most of the buyers are publicly held businesses, and as such, must find ways to grow. Emerging markets are experiencing significant increases in consumer purchasing power, and consequently, are attractive to consumer packaged goods providers and their packaging suppliers.

A second major theme in the packaging M&A marketplace is the use of acquisitions to advance the tactical corporate objectives of the buyer. These transactions have been the bread-and-butter of the M&A marketplace. Buyers have been able to expand product lines, develop economies of scale, and fill-in geographic capabilities by usng M&A. Chart 2 outlines recent transactions that illustrate this trend.

The purchasers using M&A to further corporate objectives cut across several types of ownership structures. Some of the buyers are public (RockTenn, PCA, PolyOne); some are backed by private equity groups (Packaging Dynamics, WS Packaging); and some are privately held (Menasha). However, all are using M&A to grow revenues, improve profitability, and expand capabilities.

A third major acquisition theme seen in the packaging marketplace is the continued active role of private equity. In general, the private equity marketplace today is very different than it was before the financial crisis. Prior to the financial crisis it was not unusual to see multi-billion dollar private equity-led transactions across all industries, including packaging. Today, private equity still plays a very active role in packaging, but usually on a somewhat smaller scale. Chart 3 briefly profiles some significant private equity-backed participants in the general package printing sector. Most of these companies have been quite acquisitive over the years.

Private equity investors are, in general, attracted to the printed packaging industry. The industry is often driven by the food and personal care industries, which helps mitigate economic fluctuations. In addition, many sectors of package printing are fragmented, allowing sizable businesses to be built (Multi-Packaging Solutions, WS Packaging, for example). The flow of private equity funds into packaging continues. Chart 4 outlines recent transactions involving private equity sponsors.

Valuations

There has been a steady increase in packaging M&A transaction valuations since the lows seen in 2009 (Chart 5). The improvement has been a reflection of: 1) higher earnings multiples experienced by publicly-held packaging businesses; and, 2) accommodating credit markets used to finance M&A transactions.

Chart 6 demonstrates that publicly-held packaging businesses, both paper and plastic, continue to enjoy healthy earnings multiples. These publicly held businesses, as they acquire earnings and related efficiencies, are able to capitalize them at the higher rates.

Acquirers have also benefited from liquid and low-cost credit markets. Chart 7 outlines the steady decline in high-yield rates over the last several years. Rates for investment grade issuers have demonstrated a similar pattern.

Outlook

Thanks to abundant balance sheet expansion by central banks around the world, the financial and credit crises of the past several years thankfully seem behind us. The start of 2013 has been characterized by modest economic growth in the United States, continued expansion in China, and at least a stabilization of the issues in Europe. In addition, credit markets remain liquid and global equity markets seem healthy. These conditions have led to a good start to M&A in 2013. There have been several multi-billion transactions announced involving both strategic and financial buyers.

As long as these accommodating economic conditions prevail, packaging M&A should also remain strong. Private equity funds are experiencing an upturn in fundraising, and corporate buyers are strategically benefiting from M&A. Packaging company owners should benefit. pP