In spite of transaction statistics that show deal activity increased in 2009 compared to 2008, last year was a challenging one for global plastics and packaging M&A. P&M Corporate Finance (PMCF; Southfield, MI), an affiliate of Plante & Moran, tracked 340 transactions globally in the plastics and packaging industry for 2009, up 13% from 2008's 301 deals. Looking closer, however, it found that a significant number of those deals in 2009 were "distressed."
PMCF's research shows distressed activity in 59 transactions, or 17% of the total number of deals in 2009, compared to 17 transactions or 6% of the 2009 total. The firm did see 281 non-distressed transactions, which represent a strong level of transaction activity given the market conditions. Those deals occurred in spite of credit markets being effectively closed for the first part of the year, as bank lending for transactions dramatically decreased. The global recession pushed many strategic buyers to hoard cash, and private equity buyers were reluctant to bridge valuation gaps that resulted from the lack of credit or low debt availability. In addition, valuations were adversely impacted and many sellers decided to wait until earnings increased or pricing improved.
Companies that were active took part in what could be described as a buyer's market, with a higher percentage of smaller transactions. The industry remains highly fragmented, however, and the consolidation trend will likely continue, according to PMCF, even through unfavorable conditions. The company is forecasting an increase in non-distressed, quality transactions in the plastics and packaging industry in 2010. "We believe the positive signs shown in the second half of 2009 will continue in 2010," PMCF noted in the report, "with the major variables being continued economic recovery and credit market improvement."
By sector, plastic packaging transactions increased 27% from 2008 to 2009. The 25-deal gain was led by a number of "marquee" transactions and a large up tick in food and beverage, industrial, and consumer transactions. Financial buyer transaction volume was up 31% and represented 44% of all transactions. About 25% of the growth came from strategic buyers, accounting for 56% of transactions. The relative breakdown of rigid, flexible, and bottling packaging transactions stayed consistent, with rigid packaging experiencing the highest volume growth at 31%. Both flexible and bottling transactions also experienced meaningful growth, at 26% and 25%, respectively. The 54% increase in plastic packaging transactions during the fourth quarter of 2009 suggests that momentum is strong for further industry consolidation in 2010, driven by additional financial buyer interest, steady growth in demand, and supplier fragmentation.
Plastic injection molders deals increased 10% from 2008 to 2009, driven in large part by distressed deals. Around 51% of transactions were from financial buyers, with that sub set experiencing 38% growth in deal volume. Strategic buyers, however, saw their activity drop 9% year over year. The volume of automotive transactions exploded by 155%, fueled by distressed transactions.
For film extruders, converters, and suppliers, activity increased by eight transactions, or 15%. While strategic buyer activity remained flat, financial buyer transactions experienced 42% volume growth year over year, highlighting improved credit conditions throughout the year.
Plastics raw materials experienced a moderate improvement from 2008 to 2009, with the total number of transactions up by seven, or 14%. Color and compounding deals were up significantly, expanding by 120%. The volume of sheet extrusion and thermoforming deals increased 18% last year versus 2008. This was largely led by an up tick in financial buyer activity in both volume and as a percentage of overall transactions. PMCF concluded that financial buyers are attracted to packaging as it is less cyclical than other end markets and offers steady growth. Blowmolding transactions were up by five for an increase of 29%.
PMCF's Plastics and Packaging Index has underperformed the S&P 500, on average, by approximately 3% since the beginning of Q4 2009. The Index has nearly doubled since early March following the S&P and does show signs of an economic recovery, however.
Overall U.S. private equity deal volume declined 38% in 2009, with 530 transactions, versus 859 transactions during 2008. U.S. M&A volume for deals less than $500 million totaled 9618 in 2009, a 10% decrease from 10,700 deals in 2008. The fourth quarter of 2009, however, reported 3042 transactions, an increase of 33% from the prior-year activity. Total deal value in 2009 dropped 27% year over year, but Q4 2009 was up 69% versus Q4 2008.