Plastics industry stands tall in U.S. mergers and acquisitions

Right now, timing is on your side. That is, if you''ve entertained the idea of selling your plastics company.

2005 proved to be a strong year for merger and acquisition activity across a wide variety of industries, and the middle market has been extremely vibrant. According to Thomson Financial, middle-market transactions (those valued between $25 and $500 million) increased in number by 37.1% in Q3 2005 over the same period in 2004, and deal volume increased 50%. At Harris Williams and Co. we have seen middle-market M&A activity strengthen over the last several years, and are optimistic about 2006. Furthermore, while middle-market M&A activity is strong across the board, we have seen a significant upswing in the number of transactions in the plastics sector in particular.

The plastics factor

The plastics industry was one of the busiest markets for M&A activity in 2005. Both the number of transactions and deal volume increased substantially. In fact, 2005 has seen the highest number of plastics transactions completed since 1999.

In a number of plastics transactions, we have seen broad-based interest in acquiring companies across the range of processes. This interest is from not only public and private corporations who are searching the market for companies to expand their existing domestic and international operations, but also private equity firms, or financial buyers, who own a company for a few years until a subsequent sale.

So, why are plastics companies in such demand right now?

First, the plastics industry is particularly fragmented, meaning that there are a large number of small to mid-sized acquisition targets. From a strategic standpoint, the industry serves to benefit from the synergies realized through consolidation. International buyers are looking to U.S. targets to expand their product and technological portfolios in addition to their market reach. Great examples of this would be the recent acquisitions of Delta Plastics by Rexam plc, and Poly Hi Solidur by Quadrant AG. Financial buyers, typically private equity groups, often implement a strategy of completing a significant initial purchase in an industry, known as a "platform acquisition," ahead of making several "add-on" acquisitions of smaller companies through which the buyers plan to realize synergies and increase the return on their investment. American Capital''s acquisition of DelStar Technologies is an example of a platform acquisition.

Second, plastics is not experiencing nearly as dramatic a shift to offshore manufacturing as are many other industries. The high costs associated with shipping large volumes of plastic containers or other plastic packaging to the U.S., coupled with the low labor content typically required of plastics processes, mean that a decision to move manufacturing offshore would be inefficient in many cases.

Furthermore, the overall U.S. economy continues to head in a positive direction. This strength bodes well. Also, interest rates remain low compared to historical levels, which translates to a strong lending environment to fuel activity.

All of these characteristics combined allow buyers, sellers, and lenders to find comfort in the forecast of the continued strength of M&A in the plastics industry.

What differentiates your company

We have seen the most compelling sales in the plastics sector among companies whose products contain high engineering content and whose manufacturing processes are proprietary, which together account for perhaps 20%-30% of companies in the plastics industry. Companies in this segment are commanding a high level of interest from both strategic and financial buyers and, consequently, high valuation multiples.

The distinctive engineering and process manufacturing competencies of this segment of the plastics industry are often embodied by know-how rather than patent protection, creating effective barriers to entry. This segment can also more readily pass commodity price fluctuations along to customers, leading to greater margin stability. The highly visible Tyco Plastics auction process was severely impacted by the spike in resin prices in the third quarter 2005, dropping the unit''s value substantially. Sources noted that Tyco Plastics was able to pass only a portion of the resin price increases on to its customers.

The stability and profit margins of this segment attract higher multiples. In recent trade press, multiples of five to eight times EBITDA have been suggested for plastics deals. In our experience with niche players that operate in attractive end markets, we have seen multiples in the seven-to-ten-times-EBITDA range.

If your company''s products are not highly engineered or based on proprietary manufacturing processes, other differentiating factors may include high market share, brand strength, sales and distribution channels, and customer relationships.

By Philip M. Ivey, director, Harris Williams and Co. (Boston, MA). Ivey can be reached at [email protected]. Other offices are in San Francisco, Philadelphia, Minneapolis, and Richmond, VA.