Packaging market reconfigures after decade of consolidationPackaging market reconfigures after decade of consolidation

More than half of the top 50 packaging companies have been eliminated or changed ownership over the past decade.  What does that mean to the plastics industry segment? As the consolidation of the packaging industry increases, the industry has witnessed a rise in mergers and acquisitions (M&A) activity. Tom Blaige, chairman and CEO of Blaige & Company a Chicago-based packaging, plastics and chemicals industry advisory group for mergers and acquisition management, looked at the top 50 packaging firms from 2001 to today, then looked to see if they were still operating, or still in existence. 

Blaige told PlasticsToday that within packaging, an average of 40% of the top 50 companies have been eliminated since 2001, while 13% have had a change in ownership and an astounding 53% have merged or sold. "On top of which," Blaige said, "an additional 20% of packaging companies have used M&A as a strategy, primarily buy-side acquisitions or recapitalizations."  

What drove that tremendous shift over the past 10 years, notes Blaige, is the huge amount of un-invested capital in the market place. "The amount of un-invested private equity capital totaled approximately $10 billion in 2001," says Blaige. "That soared to nearly $500 billion, which means the amount of private equity increased by nearly 50 times giving the industry $1.5 trillion in buying power. For example, Pactiv was a $6 billion deal, so you could buy 250 Pactiv's.  What this all means is that no packaging company is safe."

Blaige adds that this shift "really is amazing." Looking at the amount of un-invested capital in the market place and comparing strategic vs. financial transactions, Blaige explains that 15% of the deals were financial platforms; 18% were financial add-ons or one business tacked to another business.

According to Blaige, 53% of the flexible packaging industry leaders, including top film, sheet, and label converters, merged or were sold; 62% of the top blowmolders merged or sold, and 56% of the thermoformers have turned over. "What this says is that companies are trying to bulk-up," Blaige says, "and spin off businesses that no longer fit with the company's goals. That discipline and sharpening of focus is trickling down to middle market companies, as larger companies are threatening to take over these smaller targets. Those that don't respond positively and with proactive strategic plans will be left behind and become victims. For example, many thermoformers are small entrepreneurial companies and may not have a strategy, which makes them vulnerable, and therein potential targets."

Blaige's research shows that 10-20% of packaging companies "lead the pack through aggressive acquisitions and divestitures."  Another 10-20% of companies are "behind the curve, and rapidly losing market share" with owners that are "like the American buffalo; they may soon be extinct," commented Blaige. "The remaining 60-80% are somewhere in the middle with no strategy, and they're in danger."

Dramatic consolidation on the way

What these three different camps reveal is that companies need to make positive progress, recognize where they stand, adopt an appropriate strategy, then execute. This kind of dramatic consolidation in an industry is reminiscent of the non-plastic packaging industry 30 years ago, Blaige adds.

"There were 58 companies 30 years ago participating in the glass, metal, and can sectors," Blaige explains.  "Over 30 years, that has come down to seven companies in 2011 that have 80-90% share in metal and glass packaging. In the flexible plastic packaging sector, four companies have 34% share of the market."

Commenting on the recent acquisition of Graham Packaging by Silgan Holdings in further consolidation, Blaige says that the most "noteworthy aspect" of the deal is that "Silgan's primary market is metal containers, so Graham gives them a leadership position in plastics containers, and reducing the exposure Silgan had of metal migrating to plastic for packaging applications."

Counting film converters, blowmolders,  and thermoformers, Blaige estimates that there are approximately 800 packaging companies.  "There's a tremendous amount of pressure on even the largest most competitive businesses, which means there's even more pressure on companies below the top 50," he says.  "The implications are that this pressure will increase, not decrease, and there will be more active consolidation over the next decade than the last decade. We just studied the tip of the iceberg. There's more pressure below the surface. The dynamic will change even faster than the last 5-10 years.  What this signals is a call to action that every packaging company is at risk and must adopt a strategy. We've just been doing this research for a decade but these are the conclusions the data presented. We were shocked."

Can the little shops survive?

So, where does that leave the smaller players? Blaige believes there is room for the "small guys," however they need to be niche players.  "There are different pressures for companies of different sizes," Blaige adds. "Small companies are under the radar, doing run sizes the big guys don't want. Most of these small companies are dominated by one or two customers. If the customers go away as the supply chain evolves, these small processors don't have access to capital and have the least amount of control over their supply chain. They are also geographically constrained. The key take away is that all packaging companies, regardless of size, need to be aware of the consolidation taking place in the industry, and adopt a strategy for survival before it's too late. Those who acknowledge the critical importance of strategy and planning over the next 5-10 years have the opportunity to make it 'all worth it in the end.'"

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