State of the Industry: Global Consolidation in Packaging

As we move into the next decade, many changes are in store for owners of packaging companies. Through direct involvement in mergers and acquisitions (M&A) for more than 25 years, and using comprehensive proprietary research, Blaige & Company has witnessed the evolutionary trends of industry structures and transaction processes. Blaige & Company's new detailed Ten Year Consolidation Analysis (released February 2011) of the major packaging sectors shows that during the past decade, more than half of each segment's top 50 companies as of 2001 have undergone elimination or a change in ownership. Additionally, on average, 20 percent of surviving companies used M&A as a strategy, raising the total percentage of companies substantially involved in M&A over the past decade to 70 percent. As this consolidation trend continues, owners of packaging companies will need to develop more institutionalized strategies to continue growth or to ensure survival.

Today, packaging remains one of the largest manufacturing industries in the U.S. with greater than average fragmentation. In the past decade, the speed of consolidation has been significant and the effects have deeply impacted all industry participants. In recent years, transaction volume has been dominated by plastic and fiber-based packaging.

In fact, Blaige & Company has analyzed 1,592 deals in the packaging industry since 2002. Plastic packaging companies accounted for 69 percent of these transactions, while 28 percent were primarily made up of fiber-based packaging. Metal and glass sectors account for the remaining 3 percent of transactions since 2002.

The significantly higher activity levels in plastic and fiber packaging correlate directly with their relative levels of fragmentation. Only a few dominant companies remain in the highly consolidated metal and glass packaging markets. Blaige & Company expects consolidation in the plastic and fiber packaging segments to continue at a strong pace, which will have profound and far-reaching implications for business owners of all types and sizes of packaging companies.

2010 market overview

2010 marked a record year for the packaging sector, with deal volume reaching nearly 250 transactions. Packaging deal volume has nearly tripled during the past decade, with plastic packaging reaching an all-time high of 159 transactions and fiber reaching a high of 80 in 2010.

Plastic packaging—Accounting for nearly 30 percent of all plastics transactions, plastic packaging consolidation has had a significant impact on the overall plastics industry as leaders adopt more sophisticated M&A strategies to drive growth. During the past ten years, the volume of plastic packaging transactions averaged 113 transactions annually, and increased from 28 in 2001 to 159 in 2010. Two of the key drivers behind this rapid consolidation are a significant globalization trend and increased private equity involvement.

Within plastic packaging, more than 70 percent of 2010's 159 deals involved an international or cross-border participant. This shows a 10-percentage point increase during the past decade in international participation. Strategic deals and consolidations backed by private equity funds have increased from 78 to 84 percent of total deals during the past ten years, proving that financial involvement has had a strong impact on the plastic packaging sector. Representative deals in plastics packaging this year include Mid Oak's acquisition of flexible packaging supplier Plastics Packaging Technologies, and Graham Packaging's purchase of blow molder Liquid Container from Mid Oaks for $568 million.

Fiber packaging—Making up the second most active sector in packaging, fiber-based packaging accounted for 28 percent of all transactions since 2003. Deal volume in the segment has increased at a 14 percent compound annual growth rate since 2001, and consolidation has had dramatic effects on the industry structure. As of 2000, the top ten fiber-based packaging companies possessed approximately a 60 percent market share. With RockTenn's $3.5 billion acquisition of Smurfit-Stone, the top five companies in the segment now maintain a 60 percent market share.

Labels—The label sector plays a key role within packaging, operating within both plastic and fiber-based segments. Blaige & Company's 10-year analysis shows that 48 percent of 2001's top 50 label converters were sold or merged during the past decade. About 34 percent were eliminated through consolidation; these transactions largely represent M&A involving publicly traded or large global packaging concerns. The remaining 14 percent of the top players sold a controlling interest, yet maintained their corporate identities. This typically indicates a transaction involving a financial investor that uses the company as a "platform" for complementary add-on acquisitions. Examples of private equity growth transactions in the label sector include York Label (9 add-on acquisitions) and WS Packaging (11 add-on acquisitions).

Supply chain—Considerable consolidation took place in the global materials industry this past year. DAK Americas acquired Eastman Chemical's North America PET business in a $600 million deal that initiated a chain reaction in the industry. This deal was followed by Indorama Ventures' acquisition of Invista's PET business, Bain Capital's $1.63 billion purchase of Styron Corp. (Dow Chemical), and the Brazilian chemical giant Braskem SA's $4.4 billion acquisition of Quattor. Fewer competitors in the market could potentially lead to higher prices for manufacturers.

Of the hundreds of participants within packaging, only 10-20 percent can be categorized as "leaders." These parties are large consolidators familiar with M&A strategies who complete aggressive acquisitions and selective divestitures (purging) to optimize their global portfolio of operations. Another 10-20 percent can be categorized as "followers"—those who have rapidly lost share and have failed to adopt new competitive strategies and whose destiny is to sell at the best available price or go out of business. The remaining 60-80 percent, representing a majority of packaging companies, can be classified as "others", which are those that have no distinct strategy or plan, experience slow erosion of their market position, and may be left behind as the industry consolidates and becomes even more competitive. With 2010 representing the highest deal volume to date for the plastic and fiber packaging segments, Blaige & Company's research suggests that this significant consolidation will continue to affect all industry participants and will shape the industry's competitive landscape. As a result, owners of packaging companies will need to evolve their M&A strategies in order to maximize their value and growth potential.

Major trends in packaging M&A

The emergence of a truly global economy has created the necessity of a global strategy. As the industry's top companies continue to grow through acquisitions, they are also aggressively pursuing organic gains in market share. Cost advantages, fueled by economies-of-scale benefits such as strategic sourcing and production crossover, coupled with the need to accommodate global customers, are making it increasingly difficult for the average middle-market producer to compete. Meanwhile, international and cross-border packaging transactions have significantly increased during the past decade. In 2010, 76 percent of plastic packaging deals involved an international participant. This activity amounts to a total of 120 transactions, compared to only 80 transactions in 2003, an increase of 50 percent. Each year global markets are becoming more robust, implying that packaging companies with a strong global presence will be at an advantage going forward as their customers pursue their own global growth opportunities.

Due to the highly fragmented conditions within the packaging sector, strategically motivated acquisitions have become particularly attractive (financial add-ons and traditional strategic acquisitions). More than 80 percent of transactions in 2010 were strategically motivated. By targeting either horizontal or vertical integration prospects, these acquisitions are growth oriented and often offer operational synergies. In this market, leading acquirers have the opportunity to be very selective in choosing their targets. A common motivation for recent strategic acquisitions has been the desire to expand geographic reach through companies with similar product offerings.

While global consolidation and the fragmented industry structure have contributed to the rapid expansion of the packaging M&A market for the past few years, the rise of private equity and the evolution of debt capital markets is beginning to have a significant impact on the packaging sector as well. Since 2003, uninvested "dry powder" in the hands of private equity firms has risen from $20 billion to nearly $500 billion, with 90 percent of the increase occurring in the past five years. This increase represents an estimated purchasing power of $1.5 to $2 trillion in enterprise value; enough to finance Rank Group's recent purchase of Pactiv nearly 200 times. With this level of capital available, even the largest packaging companies should expect to be put "under the microscope."

Concurrently, the average deal size sought by private equity funds has tripled to $150 million. Coupled with the consolidation of commercial banks and the subsequent tightening of credit markets, this has created a situation in which sourcing capital for growth or an acquisition is much more difficult, particularly for small and mid-market companies. It has become necessary in this emerging environment for these companies to adopt "institutional" practices if they wish to secure capital and grow.

Adopting just a few of the strategies used by market leaders can ensure small to mid-sized business owners remain competitive and increase their chances for leadership and/or survival in today's market. Having a meaningful, robust budgeting process and management succession in place, along with a detailed competitive analysis and profitability management that incorporates product line pricing and costing models are important. Identifying complementary acquisition targets and keeping in touch with competitors is considered a value-enhancing activity; showing evidence of a successful acquisition program will really impress.

Along with these basic guidelines, another of the most important strategies for consideration is the perception of your process. Keeping in mind that business "For Sale by Owner" are perceived as less sophisticated and less competitive, signaling "discount pricing" to the most capable market buyers that can make a dramatic difference in ultimate valuation. Sellers are in competition with many other potential transactions, so creating a quality work product describing the uniqueness of the business is imperative. Many private equity firms receive multiple "deal books" at any given time. Those that are well prepared and tell a great story are perceived as attractive businesses and are advanced to the top of the pile, while others may not be reviewed at all. For this reason it is important to involve a professional advisor early and share the ups and down of the business.

2010-2011 packaging M&A market watch

Several transactions have occurred recently that are indicative of the M&A market that Blaige & Company expects to see during the course of the next decade.

Though private equity investment is not expected to hit new highs until 5-10 years from now, some institutional investors have already fully committed to the packaging industry. Irving Place Capital, for example, has completed five packaging acquisitions in the past two years, including the 2010 platform acquisition of Alpha Packaging (Blow Molding) and the add-on of Cezar SA (Label). Other serial acquirers that completed acquisitions in 2010 include Novacap (Smyth Companies; Label), companion Mason Wells (Appleton Performance Packaging, now NEX Performance Films; Film and Sheet), and Sigma Plastics (McNeely Plastic Products; Film & Sheet).

For many growth-oriented mid-market companies, partnering with private equity offers the opportunity to aggressively seek growth opportunities and fuel expansion using an external infusion of capital. Prominent label converter Fort Dearborn has nearly doubled its yearly revenue since transitioning from a private family-owned business to a portfolio company of Genstar Capital in 2006. Fort Dearborn was sold to KRG Capital this year for a reported 8.0x EBITDA multiple. Flexible packaging company Constantia has likewise pursued aggressive growth since partnering with One Equity Partners in mid-2010.

Most recently, RockTenn's $3.5 billion buy-out of Smurfit-Stone illustrates the type of game-changing mega-deals that will become more commonplace in subsequent years. The current $500 billion private equity capital overhang essentially puts all companies at risk; Rank Group's $6 billion acquisition of Pactiv clearly demonstrates this point. With everyone on the radar of institutional investors, more mega-deals of this magnitude can be expected in the near future.

Besides mega-deals, private equity funds will be jockeying for the mid-market's top quality companies. Mid Oaks' recent purchase of Plastic Packaging Technologies serves as a template for the types of mid-market companies that will be most attractive in the impending flight to quality. Companies that have shown leadership in niche markets, offer value-added product lines, and whose management teams have a proven track record for shepherding growth will be in high demand. Such companies that have taken the steps to understand and adopt "institutional" practices will be in a position to receive premium valuations.

Blaige & Company research indicates that valuation levels are expected to increase in 2011 beyond those shown in Figure 2.

Conclusion

Continued consolidation is clearly the trend for the packaging sector. The evolutionary forces at play have eliminated all but a few dominant companies in glass and metal-based packaging, with fiber packaging not far behind. While plastic packaging is still highly fragmented, the results from Blaige & Company's new detailed Ten Year Consolidation Analysis indicate that in the past decade more than half of the top 50 companies in 2001 in key flexible and rigid packaging segments were eliminated through consolidation, or experienced a change in ownership (Fig. 3).

If the effects of consolidation can have such a significant impact on the industry's largest and strongest companies in such a short time span, it highlights the importance of having a clearly defined, concrete growth strategy in place for future survival. In fact, further analysis of surviving companies points to a clear correlation between survival and global consolidators access to private equity funding. Proactive "institutionalization" of corporate practices is essential for packaging industry participants of all sizes to thrive in today's competitive market place. pP

Author—Thomas E. Blaige is chairman and CEO of Blaige & Company, an international investment banking firm that he founded in 2003. The company is dedicated exclusively to the plastics, packaging, and chemicals industries. Blaige has nearly 27 years of transaction experience, having previously served as managing director for two generalist investment banks and a middle-market M&A unit of a Wall Street investment bank, along with working as a private equity investor with Prudential Capital Group.