Packaging News asked Graham Carberry, Director at Livingstone for his views on who’s behind the flurry of M&A activity.
It almost feels that the word ‘frantic’ is an understatement when it comes to describing merger and acquisition activity (M&A) over 2014.The pace of change in the packaging market has been breathtaking affecting pretty much every sector, from plastics to cartons. The value of last year ‘s deals hit £ 13bn – at this rate, 2014 could smash that barrier.
So what’s the story behind these deals what’s the appeal of packaging at this moment in time and who are the key players in the M&A arena?
A glance at last month’s issue of Packaging News gives a useful snapshot of the kind of deals that have been going through. Global player Sonoco snapped up composite cans, drums and tubes specialist Weidenhammer for £227m. Perhaps one of the busiest groups in the market, Coveris, also made a move for Learoyd Packaging coming hot on the heels of its acquisition of St Neots Packaging during the summer.
Go a little further back in the year and you’ll find Arle Capital’s €498m deal for Innovia, RPC buying M&H Plastics for £103.5m, MPS merging with Chesapeake for £860m and Graphic Packaging International acquiring Benson Group.
There’s one fairly simple reason, according to some analysts, as to why packaging is attracting investors right now; the market isn’t that cyclical. People aren’t going to stop eating, drinking or even brushing their teeth- the products need packaging.
But there are other factors. One big attraction of the packaging and paper sector for investors is the valuable equipment; once the investment has been made it will run for up to 15 years, generating cash – a good return on investment.
Additionally, post Lehman, banks have moved away from a cashflow lending model and feel more secure lending against hard physical assets.
Then there’s the view that large swathes of the packaging industry are not cyclical; they are defensive or even counter cyclicaI. Add to that the growth dynamics and robust performance of the industry during the recession and you’re looking at an attractive prospect for investors.
Martin Chamberlain, Vice President, Senior Analyst, at ratings agency Moody’s, says: “Investors’ appetite for the sector remains high, which allows companies to extend their debt maturities, lower interest costs, boost liquidity, and for some, eliminate restrictive covenants.”
Nicholas Mockett, M&A and corporate finance expert at Moorgate Capital, notes another key development the rise of private equity companies. These players have been behind some very significant deals over the last few years. “ln 20 years of advising on packaging mergers and acquisitions, I cannot recall a time when private equity were more interested in packaging,” says Mockett.
Mockett adds that this interest has been on the rise since the start of the decade. The percentage of private equity deals dropped after 2007 due to the tighter debt markets but by 20 I 0 the percentage was more or less back at the same level as2007 of25%.
Graham Carberry, Director at Livingstone Partners, which specialises in mid-market M&A deals and advised on Coveris’ acquisition of St Neots, explains that if the potential is in place, then private equity companies are ready to invest.
He says: “lf there is a unique intellectual property position, reasonable scale and a strong management team, then there are a defined set of experienced investors which will back businesses in packaging.”
Nick Wood, UK industry leader print, paper and packaging at financial consultancy Deloitte adds: “Of the I0 biggest deals in the packaging sector this year, five of them have involved private equity. For private equity firms, a significant part of the decision to invest is based on whether they feel they can realise the value they want to exit. With a typical three-five year investment, a key consideration is whether a strategic buyer will pay a premium when they sell.”
Another trend worth noting is the level of interest from the US. Private investment company Sun Capital Partners is the name behind Coveris and has been snapping up established UK names including Paragon and Britton. Cartons manufacturers Multi Packaging Solutions (MPS) and Graphic Packaging Intemational have made moves for UK-based Chesapeake and Benson Group respectively.
Funds to deploy
Interestingly, US-based MPS is owned by Madison Dearbom Partners; Chesapeake is under the ownership of another private equity house Carlyle Group. That merger brings together more than just two carton makers and says a lot about the state of play.
“The fact is that US private equity houses have some of the biggest funds available to deploy,” says Mockett. “Combine that with their access to debt markets which are willing to lend at debt to EBITDA multiples which are high in historical terms and you can see that this population is likely to be very active in packaging M&A in Europe and the UK.”
US companies have typically been valued stronger than their European counter parts, owing to the stronger market and margins, which usually gives them a stronger hand in negotiations. The added attraction of the UK to the US is that it offers an English-speaking gateway into Europe.
So is M&A activity likely to continue? lt’s a ‘yes’ from Livingstone Partners’ Carberry. “Given the domestic and incoming international purchaser appetite and some of the technical and service innovation of UK companies we know or are aware of we expect further transactions this year and into early 2015.”
One company that’s been busy on the acquisition front is Macfarlane. Having made additions to its packaging distributions division with Network Packaging and Lane Packaging, Chief Executive Peter Atkinson is not ruling out any more deals in the future.
“We can also acquire good quality people to the business to have that is crucial to our success,” he says. “We feel that now is the time to press on and we are certainly targeting more acquisitions in the early part of next year.”
Graphic Packaging International says its growth strategy is geographic expansion, with the acquisition of Benson Group boosting its existing European Food and Beverage packaging business.
The company adds: “GPl continually strives to broaden not only our global customer base, but also our range of new products, technologies, and services. This acquisition expands our supply chain and allows us to better meet our customers’ needs worldwide.”
Moody’s Chamberlain says expect packaging sector consolidation to continue, particularly in the European market. “We expect M&A activity to pick up throughout the sector in line with the European economic recovery as companies evaluate opportunities for growth, seek competitive advantages and expand in capacity and geographic reach. Rising consumer spending in both the US and, to a lesser extent, the Eurozone, could lead to a slightly-positive growth in demand for packaged goods, particularly in the metal, glass, and plastic packaging segments.”
If that happens then the packaging landscape will look very different very soon.