Plastics industry M&A gathers steam in ‘11

That prediction is according to Polymer TransAction Advisors Inc. (PTA), of Newbury, Ohio, a company devoted to helping move forward M&A agreements plastics industry. Though macro-market conditions remain volatile, with energy and other costs still a wild card in the mix, PTA president Bill Ridenour noted that in North America, plastics-based transactions increased by 20% from 2009 to 2010, "and we see the momentum continuing with 71 likely or already announced plastics related M&A transaction by June 30, 2011 - an increase of roughly 89% over 2010," he said.

"M&A pricing has never been higher than it is now with prices in the middle market and above inducing business sellers into the market place while these prices continue," he added. Different people have different definitions of what a "middle market" company is but one broad definition is any company with annual revenue of between $5 million and $1 billion.

Valuations of companies have been helped by rebounding profits. "A business generating $2 million in 2009 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) might have sold at an EBITDA multiple of 6x or $12 million in 2009," Ridenour explained. "However, increased profitability in 2010-2011 to $3 million and an increased multiple of 8x would increase the value of the business to $24 million - twice its recession period value."

Strategic buyers (51%) and private equity groups (35%) once again led the buying spree with European-based firms and other global buyers (14% of buyers) gaining traction in North America. Business sales are being helped along by tax savings and improved acquisition financing. "A business should not be sold based on tax considerations," Ridenour noted. "However, we note that the top-end capital gain rate of 20% is threatened by the Federal Government as it struggles to control its national debt and bloated budget. An increase in the gain's rate could result in a 5-15% decrease in a seller's after-tax proceeds on a transaction - a substantial amount."

Ridenour also reported that on larger transactions, bank lending has reached as high as 4x trailing 12 month's EBITDA. "Mezzanine financing, often referred to as sub debt, has reached 2.5x EBITDA," he added. "Therefore, a large transaction can be eligible for roughly 6.5x EBITDA financing."

One caveat however: Financing for smaller transactions can still be problematic. "However, we see lending easing up on smaller deals as well," he said.

PTA had a "very active 2010," according to Ridenour, working with major strategic companies, private company owners and private equity groups. Some representative transactions were the sale of Michael Day Enterprises Inc., a $45 million nylon compounder, to Radici USA (parent company in Italy); the acquisition of masterbatch producer McCann Color by A. Schulman Inc.; the acquisition of industrial blow molder Premium Molding Inc. by Little Mountain Industries and Early Stage Partners; and the acquisition of thermoset molder/compounder Premix Inc., by Hadlock Inc and its owner Highlander Partners LP.