Technological change and environmental pressures are driving a wave of M&A in the packaging industry as scale becomes ever more important.
Think of examples of technological innovation, and packaging may not be the first that springs to mind. Yet the past decade has seen an explosion of creativity in this under-appreciated sector, and ever greater demands are being placed on the firms that wrap up the goods we consume. Common sense has dictated that packaging become less wasteful and lighter to transport. Supermarkets want food to last longer and look better. Drug companies are requiring more resistance to contamination.
“The pace of technological change has been accelerating,” says Graham Carberry, Director at Livingstone London. “One side effect of this has been a flourishing market for mergers and acquisitions.” Indeed, after a lull following the financial crisis, M&A in packaging has rebounded smartly. Global deals in the sector in 2011 were worth $28.4bn, according to data provider Capital IQ, up by over 50% since 2008 and close to the level seen in the boom year of 2007.
Waste not, want not
Environmental concerns have been a key driver of change, and there is intensifying pressure to make packages that are easier to recycle, or that can be burnt to recover part of the energy expended in manufacturing them. “Standards have been ratcheting up for five or six years now,” says McCreanor. “In addition, there is a desire for packaging that will increase the shelf life of food, and so cut back on food waste.” In the UK alone, improvements in packaging have helped save 1.2 million tons of waste over the last five years, equivalent to 128,000 full standard refuse trucks, according to WRAP, a government-funded organisation that promotes recycling.
As well as reducing waste, new developments in packaging can help drive product sales. Packaging has long been used to entice shoppers, but this increasingly goes beyond mere attractive design, says Jon Whiteman, Assistant Director at management consultancy CIL. “We are seeing more packages that can be resealed so that people can eat on the go, or labels that change colour when goods are about to expire,” he explains. “Such technological shifts lead to corporate activity as firms look to buy into new growth areas.”
In addition to food and FMCG, the healthcare market has helped drive pressure for change. Even a mature market such as the UK has seen prescriptions rise by 6% a year over the past decade, according to CIL, largely as a result of an ageing population and the increased number of medicines on offer. Here, too, the packaging challenges have been multiplying, says Whiteman: “Regulators have been demanding more tamper-proof packaging and that increasing amounts of information are included on packs.”
Big is beautiful
As packaging is becoming more sophisticated and highly-engineered, the demands on its manufacturers grow, and smaller businesses find it harder to compete. Andy Isgrig, Managing Director at Livingstone Chicago, explains: “In addition to the need to invest, packaging firms are getting squeezed by larger suppliers and customers. Increasing scale and innovation are critical efforts to combat this market dynamic. This will clearly fuel more domestic and cross-border M&A in the sector.”
Ralph Hagelgans, Partner at Livingstone Düsseldorf, adds that in many cases this scale must be international: “Companies that are heavy users of packaging are looking for a one-stop shop that can provide a range of solutions and can also service them globally,” he says. “Getting bigger also helps packaging businesses to capture more of the value chain and to better amortise overheads – for example, in design and tooling.” The recent buy-out of Excelsior Technologies and sale of WEENER Plastik (see panel, below) exemplify these trends.
“Customers are keen to bring existing North American suppliers to Eastern Europe, Asia-Pacific and Latin America,” agrees Timothy P. Burns, President of Cranial Capital, Inc., a packaging industry research and consultancy company. “What is critical is for packs in Brazil to look exactly the same as those in Britain.”
These developing markets are key drivers of growth. Consumer goods businesses like Procter & Gamble and Unilever are increasing sales in emerging markets and expect packaging companies to follow. While demand for packaging is rising by only about 2% a year in Europe, Chinese consumption has been climbing at closer to 8%, according to CIL.
Consolidation in the industry has also created its own momentum. One big push behind the latest wave of activity was the purchase by Australian business Amcor of parts of Alcan Packaging from Rio Tinto for $1.95bn, which created the world’s largest supplier of packaging to the pharmaceutical, healthcare and personal care industries. “This caused a ripple effect, prompting second-tier firms to merge,” says Carberry. “There has been a scramble to keep up.”
Finally, the importance of scale has also been underlined by commodity disruptions. In 2010, the earthquake in Chile and port strike in Finland – countries that, together, account for 12% of the world’s pulp sales – disrupted supplies to packaging companies. “The fact that large packaging businesses were more likely to get what they needed sent a clear signal,” says Whiteman. “You need to make sure you are priority number one for your suppliers.”
These pressures are unlikely to abate in the short- to medium-term, and M&A activity should remain high. This should continue to drive strong valuations for attractive independent players in the sector, particularly those with specialist expertise, niche capabilities and proprietary technology.
Recent Packaging transactions
Based in North Wales, Excelsior specialises in flexible plastic packaging that is light in weight and can often be resealed or, in the case of its food steam packs, used directly in cooking. It exports to 14 countries and, as Graham Carberry puts it, has “a tremendous platform for growth in an expanding market”.
When US-based CEO Ron Shemesh decided to sell the company earlier this year, Managing Director Dave Moorcroft contacted Livingstone. The firm ran a confidential and highly targeted process to select a financial partner capable of helping management develop the business to its full potential. The result was a management buy-out, with funds provided by London-based Growth Capital Partners.
German company WEENER Plastik specialises in innovative plastic packaging, including sealing caps, valve caps and beverage caps. It is one of the leading suppliers of closures in Europe, with a turnover of approximately €140m last year.
“The company’s customers wanted more international coverage, and this required more money to expand,” explains Ralph Hagelgans, Partner at Livingstone Düsseldorf, who headed the team that advised WEENER’s shareholders on the sale of the company to US investor Lindsay Goldberg in April.