The rise of the packaging dealmakers

  • Apr 2016

It was another year of mega-deals in the packaging industry with several investors looking to deliver growth into new segments and geographical markets. Waqas Qureshi examines some of the deals over the past year

The packaging industry witnessed another strong year of merger and acquisition (M&A) activity, characterised by demand from corporate acquirers and private equity investors, rising valuation multiples being paid for quality assets, and lower commodity prices. This all added up to deliver strong earnings.

There was an increase in the average deal size, which grew from around £60m in 2014 to around £117m in 2015. Dealmakers told Packaging News that corporate acquirers, many of whom have significant cash reserves, continued – and continue – to look to M&A as a means to deliver growth and access new end sectors and geographical markets.

The Big Deals

The five largest recorded deals in the year were:

  • Merger of Rock-Tenn Company and MeadWestvaco for £11.5bn
  • Ball’s acquisition of Rexam for £5.5bn
  • Owen Illinois’ acquisition of Vitro’s food and beverage glass container business for £1.55bn
  • Gerresheimer’s acquisition of Centor for £500m
  • Carlyle’s acquisition of French glass packaging company Saverglass for £436m

Stable sector

A number of the larger players sought to benefit from increasing scale, while private equity houses were attracted by the sector’s relatively stable demand on the back of stable, low commodity and energy prices.

There was also increased investment from the US to Europe, particularly the UK. US investment in the UK is a trend that shows no sign of abating – illustrated most recently by ESCO Technologies’ acquisition of thermoformed packaging manufacturer Plastique in February 2016.

Nick Wood, director and packaging deal maker, Deloitte, says: “It is now seen as the most valuable deal corridor in the world, with US businesses acquiring more UK assets than all other countries combined. In the last 18 months, there were 300 deals by US purchasers of UK assets and 190 deals of UK purchasers of US assets.”

According to Nicholas Mockett, head of packaging M&A, Moorgate Capital, 2015 saw a new record in packaging mergers and acquisitions with over US$35bn of deals – surpassing even 2007’s US$33bn and a significant recovery from the US$18bn of 2012.

David Cheetham, market analyst at commodities broker XTB UK, points out the biggest and third biggest acquisitions last were both carried out by private equity firms, and the attractiveness of companies in the packaging sector to external investors, despite their rising valuation, illustrates the increasing desirability of these firms.

He said statistics from Bloomberg showed the average (mean) deal size for 2014 was £97m and 2015 was £191m – although this was subject to exchange rate fluctuations.

“Either way it’s clear that the average deal size for last year experienced a sharp increase from the prior year, seemingly aided by the low-level of interest rates around the globe keeping the financing aspect of these deals relatively cheap by historic standards.”

Expand into packaging

According to Barry Sheehan, associate director at Livingstone Partners, there was acquisitive expansion into the packaging sector from corporate acquirers operating in other sectors.

For example, some key players in the print sector have sought to address challenging markets by extending their offering into packaging. This trend has been more apparent in North America so far, as illustrated by Transcontinental’s acquisition of both Capri Packaging and Ultra Flex.

“On the private equity side, high levels of ‘dry powder’ – capital that has been committed to a fund, but not yet invested – continues to fuel M&A activity, with a number of notable private equity deals completed in 2015, such as Wendel’s acquisition of a majority stake in Constantia Flexibles and, here in the UK, Mobeus’ MBO of expanded polystyrene provider Styropack and Jablite out of the Synbra Group,” adds Sheehan.

There are mixed views regarding expectations for 2016. From a wider macroeconomic perspective, a slowing Chinese economy, volatility in oil prices and some softening in US and European debt markets has led to a degree of cautiousness with market participants.

Sellers market

The Q4 2015 Deloitte CFO survey showed a dip in risk appetite for the second quarter in a row. “That being said, we have not seen this translate into a reduced appetite for M&A led growth and the number of corporates with healthy balance sheets seeking acquisitions remains very high,” explains Deloitte’s Wood. “Similarly, following successful fund raising processes or slower than expected deployment rates, the dry powder available in private equity funds remains at an all-time high. For owners of quality businesses, it feels like 2016 could be a sellers market.”

XTB UK’s Cheetham adds: “As for a potential softening in European and US debt markets, the performance of then respective economies and more specifically inflation dynamics suggest we could have an increasing divergence in monetary policy from the European Central Bank (ECB) and Federal Reserve in 2016.”

Additionally, Livingstone’s Sheehan says that while slower growth in the Chinese economy, volatility in oil prices and stock market instability has grabbed the headlines in the first two months of 2016, this has not materially impacted upon M&A appetite, as the factors which made 2015 such a strong year have not changed. “Our view is that M&A activity – in terms of both value and volume – is likely to remain high in the year to come.”

Companies that are reliant on a low number of raw material inputs could face increased risk from price volatility and supply disruption, which could impact their competitive position.

Moorgate Capital’s Mockett added: “Many of our clients are focusing their M&A activity on developed markets such as western Europe as the outlook in some Emerging Markets, such as China, is looking less promising. But the financial markets started 2016 with considerable turbulence. Well funded corporates may continue to acquire apace, but others which need to borrow, such as private equity, may find they are less able to raise the financing to make the numbers work.”

Hunt for yield

Martin Chamberlain, vice president – senior analyst at Moody’s, adds: “Despite increased downside risks to global GDP growth in 2016, we expect M&A activity in the European non-paper packaging industry to continue on a par with last year and companies to take advantage of windows to tap the market.

“We also expect investors to continue their hunt for yield, with euro-area interest rates at an all-time low. On the positive side for the packaging sector, approximately two-thirds of rated company sales are to food and beverage end-markets, which puts a floor on demand.”

The packaging sector provides as good an investment opportunity as any, and analysts expect business to continue booming in 2016.

Click to view April issue of Packaging News (subscription required).

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