Often described as recession-proof, the packaging manufacturing sector beckons investors, wary or bullish, with the promise of sure and steady growth. Mergers and acquisitions, like the recent deal between Ampac and Prolamina, have become a winning strategy for private equity firms and packaging suppliers alike.
Just ask Rick Weil. As the paper and packaging expert, he’s handled more than 70 mergers and acquisitions since joining Mesirow Finanacial Investment Banking as managing director.
Weil recently outlined three reasons for the rosy outlook:
1. Packaging chief executive officers will continue to leverage M&A to fuel growth. “Weyerhaeuser, Temple-Inland and MeadWestvaco are just a few of the many companies swallowed up by packaging CEOs’ appetite for mergers and acquisitions.”
2. Excess private equity capital will increase the appetite for packaging deals. “As of mid-2015, dry powder has reached a 10 year high for private equity firms—the packaging industry continues to be a key target.” [“Dry powder” refers to cash reserves kept on hand, to cover future acquisitions, for example.]
3. Packaging firms’ cash flows will remain stable for the remainder of 2015. “Unlike other industries like capital goods, the packaging sector will not see the same cyclical growth patterns that cut into returns.”
How does the current business climate benefit you? We caught up with Weil and asked him.
In the packaging sector, is most of today’s growth organic or coming more from mergers and acquisitions? Why?
Weil: For many packaging companies, growth has been evenly split. But in today’s environment, growth by acquisition is easier than organic growth. The restrained economic growth of the global economy impacts the ability of companies to expand. Simultaneously, companies are under pressure to spend their idle cash through share buybacks or M&As, and keep both earnings and stock price growing. This all at a time when their revenues are not growing and any cash they have is earning next to nothing thanks to zero rates.
Why is the packaging sector a key target now for private equity investors?
Weil: Packaging remains attractive to private equity largely because it is viewed as lower risk and less cyclical than other sectors of the economy. The use of leverage in a cyclical environment can be risky. However, given that packaging is often driven by the food, beverage and personal care industries, the cash flows may be more reliable and consequently more suitable to a private equity capital structure.
Why do you say that packaging firms’ cash flows will remain stable for the remainder of 2015?
Weil: The packaging’s market’s relative strength remains evident from the sector’s largest public producers. IP, PCA and RKT all achieved increased operating profits in at least one of their packaging divisions. Additionally, the majority of production costs come from raw material costs, and prices can be extremely volatile. However, less expensive oil cut fuel costs and reduced the price of oil-based packaging industry chemicals.
How is the packaging supplier business climate affecting prices, availability, lead times and innovation for their customers?
Weil: The preference for more value-added packaging and customized packaging solutions to provide convenience, upscale appearance and freshness protection has bolstered technology advancements and continued efforts to innovate and differentiate across the packaging industry.
More specifically, packaging converters looking to reduce production and transport costs are benefiting from an increase in flexible packaging types, aided by the continual development of new pouch designs and by growing consumer demand for convenience and packets that are easy to open and close.
Additionally, numerous vendors are using M&As to establish manufacturing plants in emerging markets where production costs are low, the efficiency level is high and they’re in close proximity to their clients, leading to decreased lead times and prices.
We’re seeing quite a bit of M&A activity in the flexible packaging and paperboard packaging segments? Why is that? How will this benefit buyers of flexible and paperboard packaging?
Weil: According to a recent Smithers Pira report entitled, “The Global Flexible Packaging Market 2015-2019,” flexible packaging has been one of the fastest growing packaging sectors over the past 10 years, thanks to increased consumer focus on convenience and sustainability. To keep up with consumer demands for new technology at high volumes, flexible packaging companies have been consolidating rapidly and realizing operational efficiencies.
As a result of changing customer demands, paperboard companies, which are often deemed as less sustainable and eco-friendly, have been teaming up with larger entities that can provide additional resources to allow the company to better compete. Ultimately, M&A in these sectors will allow packaging companies to improve growth plans or operational efficiencies, and ultimately reduce costs for end users while still meeting their growing and changing demands.