P&M Corporate Finance Reviews M&A Activity
- Published: March 27, 2018
CHICAGO, IL | P&M Corporate Finance (PMCF), an investment banking firm focused exclusively on middle market transactions, has released the 2017 Pulse Year in Review. Included are highlights on key industry trends shaping the packaging landscape, including private equity's rising impact and their areas of focus, pricing on key deals and overall valuation trends, marquee transactions, benchmarking statistics for publicly traded packaging leaders, and more. Despite a slight pull back in global M&A activity, deal volume in the packaging market remained steady through the end of 2017 with 76 transactions in Q4. 2017 packaging M&A reached 307 transactions, which reflects a 4% increase over 2016’s 294 total deals. Driven by a strong Q2, 2017 marks the third straight year of M&A growth in the sector and establishes a new multi-year high for packaging transaction activity.
Strategic buyers continue to be the primary driver of deal volume, completing a number of “marquee” transactions in Q4 2017, and new platform investments were up 22% year-over-year. Complementing strategic buyer activity, private equity contributed more than a third of deal volume in 2017. John Hart, managing director of PMCF and head of the firm’s Plastics & Packaging team, says, “The increasing mix of private equity buyers is reflective of the positive attributes of the packaging industry. Packaging companies are benefitting from strong tailwinds, including increased consumer spending and the strong growth of e-commerce. With strong cash flows and some degree of insulation from a potential downturn, the industry has garnered private equity investments at a record pace.”
Further building out their platform investments, private equity firms have pursued more than 50 add-on acquisitions in 2017.
The report says 2017 M&A volume in the packaging sector was primarily driven by consolidation activity within the paper related and rigid plastic sectors, making up 65% of all deals. These segments experienced 7% and 12% growth year-over-year, respectively, and comprised 65% of all packaging deals. Flexible plastic packaging deals were down 4% from 2016; however, this is likely the result of a lack of quality targets for acquisition as interest in the segment remains high. Hart says, “Changing consumer preferences in the food and consumer end markets and the shift to dimensional weight-based transport pricing are increasing the demand for flexible packaging solutions.”
Overall, demand for packaging businesses remains strong, the study says, and further upside to deal volume was likely hampered by a scarcity of targets to purchase. The market is aware of this imbalance and pricing in 2017 responded accordingly. PMCF’s data shows that EV/EBITDA multiples expanded in 2017 to multi-year highs. Private equity, armed with post-crisis record amounts of dry powder and access to low cost financing, have demonstrated interest in the space and are proving competitive in the M&A market from a pricing perspective. Not to be outdone or rather outbid, strategic buyers continue to use M&A as a tool to grow above industry averages, gain new technologies, penetrate end markets, and capture synergies as the sector evolves and consolidates.
Although there has been a recent flurry of packaging M&A activity, the sector remains fragmented and further consolidation aimed at reducing costs and increasing product differentiation is likely to continue. According to Hart, “Current pricing levels and buyer dynamics, along with the recently enacted tax reform and growing optimism on the economy, have the potential to accelerate M&A activity. However, despite all these positives, we continue to note the extended length of the current M&A cycle and caution shareholders that these ‘seller’s market’ conditions may eventually revert.”
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