INTRODUCTION
Blaige & Company (“Blaige”) has been a leader in the plastics processing industry and its supply chain for over two decades. In addition to closing numerous transactions with industry leaders, our leadership position is exemplified by our proprietary research through our affiliate Blaige Industry Intelligence (“BII”), covering the competitive dynamics of the plastics processing and converting industry, and, in particular, the impact of consolidation of the participants throughout the supply chain. BII research indicates that the plastics sector is a “lightning rod” for M&A deals, as illustrated by the ever-increasing demand for acquisitions and record purchase price premiums paid for plastics processors.
The plastics processing sector has unique characteristics or “valuation drivers”, which contribute to above-average valuation premiums, thus, plastics companies are “hot commodities”. There are three distinct plastics market valuation drivers: (1) extreme fragmentation, (2) broadening consolidation trends favoring the small/mid cap converter universe, and (3) global brands that are demanding larger platforms and supply networks, which in turn is driving demand for small/mid-caps as large caps continue to build up platforms.
Through the pandemic, domestic plastics processors in all sectors have reconfirmed their “scarcity value” due to their positions as one of a finite number of key North American suppliers. Many founder-owned plastics processors continue to be “rewarded” with premium valuations in 2023 due to the scarcity value.
These plastics leaders have largely been those, which responded positively and drove success through the pandemic-induced uncertainty in sourcing resins/additives, raw materials, labor, input price inflation, scarcity/volatility, and supply chain/sourcing issues. Those that have successfully navigated these hurdles while remaining profitable are highly sought-after in today’s market. As a result, the historically strong multiples in plastics M&A remain at the record levels for “leaders”.
Those continuing to struggle with losses post pandemic need to be cautious due to the tight credit market with rising interest rates. Valuations have dropped for troubled companies as a result of the “flight to quality” by bank credit and private equity investment committees on the heels of a banking crisis earlier this year.
WHY PLASTICS PROCESSORS ARE HOT COMMODITIES?
1. Extreme Fragmentation Attracting a Growing Number of Consolidators, Record Amounts of Investment Capital, and Driving up Valuations for All Sector Participants.
The plastics industry structure is the most fragmented we have found, and naturally it generates a significant level of M&A, as the natural consolidation occurs among the hundreds of processors (in any given sector). This consistent demand can drive value and positively influence multiples.
BII recently publish
ed the 21-year Plastics, Packaging, and Chemicals M&A Consolidation Study where we studied over two thousand processors and converters in seven segments throughout the plastics supply chain over the past two decades. global plastics deal activity has more than doubled over the past 21 years, increasing from 215 in 2001 to 550 in 2021.
The industry is made up of primarily small/mid-sized companies, 82% of processors and converters have annual sales of less than $100 million, with 72% under $50 million. However, the majority of the M&A activity is occurring among the large-cap processors, which have established the competitive advantage against the small/mid-cap processors. The big processors are getting bigger, while putting an increasing pressure on the smaller, founder-led businesses.
Those companies with greater access to capital are approximately four times larger than their privately funded counterparts, placing them in a stronger position to survive fluctuations and fund projects for growth.
Small/mid-cap processors that do not seek access to capital through M&A as a strategic tool may likely find themselves in the position where they need to take the risk of “betting the farm” to secure sources of capital.
In the plastics industry, M&A deals involving private equity, either platforms or add-ons, have grown from a 15% share of deals to 49% in twenty years.
This fragmentation creates a strong attraction and an above-average demand, resulting in premium valuations for niche, high-performing small/mid-cap plastics processors. A significant number of small/mid-cap entities are available for consolidators as “building blocks” to create national and global entities. Thus, the high fragmentation attracts investment capital backing consolidators seeking to accelerate top-line growth through acquisitions and drives up the valuation premiums. The two favorable demographic factors that are fueling current plastics M&A are: founder retirement and lifestyle adjustments.
Due to the short history of the plastics industry just since the World War 2 (1940s), there is an increasing number of founders seeking succession solutions. Driven by post-pandemic lifestyle preferences, more founders are studying succession options for them and their families. Due to the above factors, plastics founders in record numbers are now seeking to understand how they can optimize their individual situations when it comes to M&A strategy for succession.
Once they engage in a discussion with us, our team can best determine how to more positively position the company to the preferred types of strategic and financial partners.
2. Historical Large-Cap Consolidation Trend Moving Downstream to Small/Mid-Cap Processors Over the Next Decade, Increasing Demand for and Valuation of Regional Processors.
The consolidation trend over the past two decades has been concentrated amongst large-cap processors, with 76% of the top 50 plastics processors that merged or sold since 2001.
However, over the next decade, the consolidation trend will shift to the most fragmented and least consolidated segment of small/mid-cap plastics processors, which will demand greater premiums.
3. Global Customers / Brand Owners Demand Expansive Footprint and Multiple Products, Inducing Large-Caps to Acquire Small/Mid-Cap Processors, Thus, Increasing Demand and Valuations.
Over the past decade, small/mid-cap regional service-oriented won tremendous volumes of business from large-caps which initially stumbled in integration while they assembled large platforms. However, the dust has now largely settled, and the landscape matured, so now large-cap suppliers are more effectively using their global footprint and bundling strategies to win back previously lost business. This puts single-plant, privately held plastics processors at a strong disadvantage.
Global brand owners not only require high quality and service, in which niche suppliers excel, but they also demand a broader offering with consistency across multiple geographies worldwide.
In order to face this growing trend, many large-cap plastics processors are seeking to establish this scale by acquiring regional small/mid-cap processors, many of which will overcome weaknesses (single-plant/process) by securing a larger partner, with which to “weather the storm.”
WHAT HEADWINDS TO ANTICIPATE?
Multiple strengthening headwinds caused by the consolidation over the past two decades are driving small/mid-cap owners and their successors to consider financial or strategic partners.
1. Customers Are Demanding Suppliers with the Scale to Offer Multiple, Redundant Operations and Broader Capabilities and Processes, which are Often Beyond the Budget of Most Small/Mid-Cap Plastics Processors.
Consolidation-induced scale advantages resulting from international footprint and vertical/horizontal integration established over the past two decades have provided major advantages to large consolidators, creating competitive pressure making it more and more difficult for small/mid-cap processors to compete.
This “tectonic shift” has tilted the competitive landscape against small/mid-cap processors. Now, as the dust has settled from the first two decades of consolidation, large-cap leaders are refining their strategies and deploying major capital to wrestle the business away from small/mid-cap processors.
2. Horizontal and Vertical Integration Shifting Cost Structures and Tilting Competitive Landscape Against Small/Mid-Caps.
Large-cap consolidators have utilized vertical integration to gain significant cost advantages by establishing captive sources of substrates. Large-cap processors have also pursued horizontal integration to offer customers multiple complementary products, such as a establishing a one-stop shop for food/beverage/personal care containers produced via injection molding, blow molding, thermoforming, and blown film extrusion processes.
3. Environmental, Social and Governance (ESG) Push Making It Increasingly Costly and Difficult to Compete.
Global brand owners such as P&G, Cargill, Amazon, and Apple are mandating suppliers to adopt costly ESG practices, which can overwhelm small/mid-cap processors. As these global entities evolve, and new generations of management take over, it is expected that large-cap processors will gain a significant advantage by aligning with ESG practices. This advantage will be utilized to attract substantial portions of business away from small/mid-cap processors.
4. Succession Crisis: “Betting the Farm”.
Succession-planning-driven plastics sector M&A is expected to reach record levels in the next decade, primarily due to the age of founders and first- and second-generation business owners. Second- and third- generation owners are realizing that the headwinds and challenges in the new plastics industry structure will make it increasingly difficult, if not impossible, to replicate the success achieved by their parents and grandparents without access to institutional or strategic capital.
HOW TO SECURE THE VALUE CREATED OVER PAST DECADES?
Founders and their families are realizing that the competitive landscape has shifted due to consolidation. They now understand that securing a strategic or financial partner could be the best option to safeguard their legacy and organization for the future instead of “betting the farm”. Moreover, by avoiding pre-emptive offers and initiating a competitive process with Blaige, which highlights the growth opportunities to the appropriate universe of potential partners, a premium valuation can be achieved. Our process ensures that your plastics business is recognized as a very “hot commodity”.
Thomas Blaige, CEO and Chairman of Blaige & Company stated: “While empirical research points to a 30% valuation discount associated with pre-emptive offers, our practical experience points to a much greater discount, 48% over the past 8 deals.
Thus, while all founder-owned processors can expect pre-emptive offers in today’s M&A market, they should avoid them at all costs, undertake a professional and methodical negotiation strategy, and partner with Blaige & Company.”
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