(PTA) makes in his latest report covering the first six months of 2011 in the plastics industry. "With oil prices increasing (and likely to decrease) daily due to the instability of the Middle East, placing price pressures on converters and end customers, the plastic and chemical sector is a volatile place to be," commented Ridenour. "We see oil prices continuing to fluctuate during the summer and beyond, barring a successful resolution of the Libyan political crisis."
The short and midterm winner in all of this uncertainty will be olefin resins and other products (and those businesses in the olefin supply chain) which use liquid natural gas (LNG) as a feed stock, as other monomer producers and other users restart idle plants and build new plants to capitalize on cost advantages of products based on LNG over oil-based products, Ridenour explains in his report. LNG is the basis for most olefins in North America. He projects that global investment opportunities will lead to petrochemical joint ventures, acquisitions and internal expansions as resin and monomer producers as well as private equity groups get in on the action. "The short and midterm loser will be China, which until recently was considered a major threat to domestic production of olefinic resins," Ridenour projects.
Uncertainty also creates opportunity and one result is that merger and acquisition (M&A) pricing is high, with prices in the middle market and above inducing business owners to consider selling while these prices continue, PTA's report noted. Business profits have also rebounded, increasing the overall value of M&A's. For example, Ridenour cited an example of a business generating $2 million in 2009 EBITDA that might have sold at an EBITDA multiple of six times, or $12 million, in 2009. However, increased profitability in 2010-2011 to $3 million and an increased multiple of seven times have increased the value of the business to $21 million - 75% more than its recession period value.
Completed transactions in the North American plastics industry in the first half of 2011 (81 transactions) increased by roughly 10% over the first half of 2010 (74 completed transactions). Ridenour cited reasons supporting sellers' calculation to sell and buyers' logic for making acquisitions. "In our opinion this is due to several factors: strengthening bank and secondary financing, stronger earnings which together with stronger financing increases the prices paid substantially, the uncertainty associated with the economy beyond 2011 and the volatile federal tax situation, and what we see as the vulnerability of the 20% gains tax to be increased substantially," said Ridenour.
Plastics processing transactions by process show that the largest sector was injection molding with 19 transactions, followed by film/sheet extrusion (17) and pipe, tube & profile extrusion (14) in the first half of 2011. "There was also considerable activity in compounds and masterbatch," noted Ridenour. "We also note that foreclosures, bankruptcies and plant closures continue to be about half the number that they were during the 2008-2009 recession, i.e. healthier companies in general are being sold now."
Strategic buying trumps other forms, said the PTA report, with strategic buyers representing 51% of all deals completed. Private equity groups represented 34% of the buyers. "We expect global buyer activity in the U.S. to pick up further in the second half of this year, however, as the Euro and British Pound continue to remain very expensive to the U.S. dollar at $1.42 and $1.65 respectively."
While PTA's report states that a business should not be sold based on tax considerations, tax savings spurred business sales during the first half of 2011."We note that the top end capital gain rate of 20% is threatened by the (U.S.) federal government as it struggles to control its national debt and bloated budget," said Ridenour. "An increase in the gains rate could result in a 5-10-15% decrease in a seller's after-tax proceeds on a transaction - a substantial amount."
Additionally, financing has improved, particularly on larger transactions where bank lending has reached as high as four times trailing 12 months' earnings. Mezzanine financing has reached 2.5x EBITDA. "Therefore, a large transaction can be eligible for up to roughly 6.5x EBITDA financing," Ridenour stated. "Financing for smaller midmarket-sized transactions can still be problematic, however we see lending easing up on smaller deals as well."
PTA's M&A activities include transactions among major strategic companies, private company owners and private equity groups. "We are currently working around the world with our new resources in India and Eastern Europe on a mix of sale and acquisition search engagements," said Ridenour. "We continue to offer a broad range of merger/acquisitions services to polymers and plastics businesses, where we have now completed nearly 200 transactions of all sizes, as well as advice in corporate development issues and market research."