Unpacking the Perennial Appeal of Packaging to M&A Investors

Some printing companies start out as packaging producers. Others evolve into the specialty from something else. This is pretty much a distinction without a difference for M&A investors, who care more about what a company brings to the table now than what type of business it was on day one.

Having watched package printing come through the pandemic mostly unscathed, private equity (PE) buyers recognize the segment as a smart play — an essentially recession-proof market where customers are loyal, margins are substantial, and opportunities to build “platforms” of related businesses abound.

Commercial printing companies without a footprint in packaging generally aren’t as attractive to PE investors. We find that offering them for acquisition tends to draw fewer potential buyers than we typically hear from when our selling client is a packaging producer.

A Sensible Strategic Move

This isn’t to sell commercial printing short: a well-run and profitable commercial printing business will almost always find a compatible buyer at a fair price. But it does explain why so many commercial printers have expanded into packaging as a strategy for growth in the present day and acquisition on more favorable terms at the appropriate time down the road.

It isn’t an overnight transformation. For example, a printer entering the carton business will need to make a substantial capital investment in the other postpress hardware that makes flat sheets into dimensional containers. Substrates and manufacturing workflows will be different. Sales and marketing tactics will have to change. A time frame of three to five years might be needed to accomplish all of this. The investment starts to pay off with new clients and higher margins almost immediately.

A company will see a higher business valuation when commercial printing has shifted to roughly 50% of its volume to packaging, which could include labels — a particularly strong lure for PE investors right now.

As a company’s product mix changes, so does the perception of its value as a candidate for acquisition. Even if it isn’t totally committed to packaging, a company will be treated as if it were by PE buyers. That could mean selling at a multiple of EBITDA one or two points higher than the business could have expected had it remained a commercial shop.

We saw this transformation happen with a commercial printing client of ours that added a diecutter and a folder/gluer. Within three years, packaging represented 35% of the client’s volume and was growing rapidly. A PE investor bought the company, doubled its business in just two years, and sold it to a strategic buyer for a handsome profit.

A similar story involves a general commercial printer in the Midwest that for many years primarily used half-size, four-color offset equipment. Twenty years ago, the printer added 40" presses and eventually purchased a small finishing operation with diecutting capabilities.

Over the past 15 years, the business has evolved into a packaging powerhouse with sales well over $40 million. These types of transitions from commercial printing to packaging greatly enhance the value and marketability of the company when and if the owners decide to sell.

Out the Door, Back for More

Packaging printers don’t have to be reminded of what makes their segment of the market so compelling both to financial investors, like PE players; and to strategic investors, who buy companies similar to their own as a supplement to organic growth.

One of the packaging market’s most noteworthy characteristics is the strong customer loyalty it inspires. Our packaging clients tell us that once a customer places an initial order and the work is satisfactorily delivered, repeat work almost always follows.

This is simply a good business practice. Because makers of packaged goods see the cost of the packaging as small in comparison to the cost of producing the item inside, they resist changing packaging providers for the sake of saving a few pennies. Contrast this with the price-driven competition of the commercial printing market, where customer “stickiness” can be much harder to assure.

No wonder, then, that the convergence of the commercial printing and packaging printing markets continues to take place. Some commercial printers are taking their first steps into packaging by investing in digital printing and finishing systems that let them produce short runs of packaging and labels at a profit — something that full-size offset producers can find difficult to do.

This lets the commercial shops serve customers such as craft breweries, restaurants, and others that buy packaging and labels the same way they produce what they sell – in small batches. Commercial printers have a number of directions in which they can go to expand their businesses and better position themselves for acquisition, but packaging remains one of their most favorable options.

Buyers, Buyers Everywhere

As 2023 winds down, we see no reason for anything but optimism on the M&A front when it comes to packaging. New financial and strategic buyers are entering the market almost every week — there are more of them on the lookout for acquisitions than we have ever encountered before.

The pace of M&A transactions has slowed this year, but only in comparison to the record activity the industry witnessed in 2021 and 2022. We’re confident that the pace will remain healthy for the balance of 2023 and for as far ahead as we can see into 2024, especially for packaging producers.

That’s why we continue to urge all print company owners to think of themselves as buyers or sellers even if they aren’t ready to pull the trigger on a deal. There’s never been a better time to be in either of these roles or to start planning how to make the most of the opportunities they offer.