It seems that every week we are waking up to news of yet another merger or acquisition within the packaging industry. Over the course of 2018, we saw a wide variety of transactions ranging from the occasional blockbuster, such as Amcor’s long-rumored acquisition of Bemis, to the far more frequent product line tuck-in, such as ProAmpac’s purchase of medical pouch maker PacTech, to the geographic tuck-in, such as Resource Label Group’s acquisition of Toronto-based label company Ingenious Packaging.
But whether it be a small tuck-in or an industry-transforming deal, one thing is for certain: merger and acquisition (M&A) transactions have had a significant impact on the continued growth and evolution of the flexographic industry, and the players within it. Let’s take a look at the industry dynamics and the various factors driving this consolidation trend.
Average EBITDA Multiples for Plastics & Packaging M&A TransactionsData courtesy of S&P Capital IQ, Mesirow Financial
Drivers of Consolidation
What drives M&A activity from both the buyers’ and sellers’ perspectives?
For many buyers, it’s the quest for growth in earnings from both cost and revenue synergies, as well as possible capital expenditure avoidance. Pressure to improve efficiencies and profitability in an economy characterized by maturing organic growth has led companies to pursue acquisitions in an effort to demonstrate growth to their investor base. In an environment where costs have already been reduced over the last several years and companies are struggling to achieve organic growth, M&A can provide a viable pathway for expansion. Many leading companies have diversified their product portfolios and expanded their sales channels and geographic reach through acquisitions—After all, you can only cut redundancies for so long before running out of costs to trim away.
Sellers are facing a confluence of issues that consistently result in margin pressure. Some of the more prominent factors driving sellers to explore M&A include:
- Customer consolidation, which puts even long-term client relationships at risk
- Volatile/increasing raw materials costs
- Vendor consolidation
- Customer globalization—shift by customers to global suppliers requiring multiple plants
- Maturing growth
- Demanding customers—requires continually increasing capital expenditure
The decision to sell is typically multifaceted and involves several of the following themes: estate planning, diversification, pressure to compete with better-capitalized competitors, opportunity to benefit from potential synergies and/or an offer that can’t be refused. Everyone asks, “What should I do to prepare my business for sale?” Invest in your people. Manufacturing, sales, customer service, marketing, finance—These investments never go out of style and are rewarded at the right time to sell.
The packaging industry has actively been consolidating, particularly within the primary substrates that flexo encompasses, including flexible packaging, labels, folding cartons and corrugated.
Corrugated & Folding Cartons
The two primary paper-based substrates—folding cartons and corrugated—are experiencing stagnant growth and mature markets. The folding carton industry has largely consolidated, as its two largest North American players, Graphic Packaging (37 percent) and WestRock (28 percent), have become the dominant players with a combined market share of 65 percent, according to American Forest & Paper Association (AF&PA) and Mesirow Financial estimates.
While corrugated packaging can also be characterized as a mature market, it remains the workhorse of the packaging industry, and the growth of Amazon and other internet retailers has kept it a modestly growing sector. Consolidation has been ongoing within the containerboard substrate, with International Paper (32 percent) and WestRock (22 percent) currently accounting for 54 percent of market share, compared to the two top players, Stone Container and Georgia-Pacific, which only accounted for 22 percent of the market in 1995, according to International Paper Investor Presentations. We expect to see continued consolidation and growth through acquisitions.
Flexible packaging and labels are the higher-growth substrates, which operate in much more fragmented markets. Flexible packaging benefits from the secular trends of paper to plastic and rigid to flexible. According to the Flexible Packaging Association (FPA), there are several hundred flexible packaging companies in North America. While organic growth is steadily in line with GDP, with pockets of end markets that grow at higher rates, the number of competitors is simply too high, and consolidation is an inevitable outcome.
The pair of charts at right above shows how the top 10 players in flexible packaging have changed since 2011, largely as a result of M&A. Amcor, which until very recently was not a top player in North America despite being the largest in Europe, is now the largest flexible packaging company with $4.6 billion in sales and 19 percent market share. Other serial acquirers who have gained a greater percentage of market share since 2011 include Novolex, Transcontinental and ProAmpac, according to Flexible Packaging Magazine. Consolidation in the North American market is expected to continue.
The label markets are even more fragmented, with nearly 2,000 label companies in North America alone with revenues in excess of $1 million, according to Label & Narrow Web. The barriers to entry in this sub-segment are not as significant, allowing for a larger host of competitors. Though M&A consolidation has been ongoing, the two largest players in the industry, CCL Industries and Multi-Color Corp, each still has only 5 percent market share, compared to a combined total market share of 5 percent in 2010, according to Robert W. Baird, Multi-Color Corp and Mesirow Estimates.
While the fragmented flexible packaging and label sectors have already seen significant consolidation over the past several years, we can still expect more activity to come as M&A continues to fuel growth and increase shareholder value. The inflow of private equity capital has also been fueling growth via M&A in flexible packaging and labels. With significant levels of capital ready for investment, private equity acquirers are drawn to the attractive growth characteristics, diverse end markets served and fragmented nature of these sectors.
In the flexible packaging industry, ProAmpac (Pritzker Group), Novolex (Carlyle), PPC Flexible Packaging (Morgan Stanley) and Transcendia (Goldman Sachs) have been prolific acquirers, while Resource Label Group (First Atlantic Capital), Brook & Whittle (Snow Phipps), WS Packaging (Platinum Equity) and Fortis Solutions (Main Post Partners) have been the most active acquirers of label companies. We expect continued significant investment into the flexible packaging and label industry coming from the private equity universe.
Finally, valuations for the various flexo substrates have been hovering around historical highs for both publicly traded companies and in private market transactions. Sellers looking to capitalize on high valuations may find the current deal-making environment is ideal for pursuing an exit. Given these various dynamics that are at play, I expect I’ll continue to be greeted with the news of a new M&A transaction along with my morning coffee for many years to come.
About the Author: Louis Mitchell is a managing director in Mesirow Financial’s Investment Banking Group. He is responsible for providing advisory services on middle-market M&A assignments within the paper, plastics and packaging sectors. Louis has been involved in more than 100 M&A transactions involving industry consolidators such as Resource Label Group, Amcor, ProAmpac, CCL Industries, Cenveo, Coveris, Georgia-Pacific, Graphic Packaging, Greif, Huhtamaki, Hood, Intertape Polymer, Printpack, Sabert and Sonoco, among others. Louis can be reached at [email protected].