The next time you wander through your local supermarket, check out the bags, bottles and boxes themselves, not just their contents. True, a few packages haven't changed in appearance since the days when Kellogg Co. sponsored the "Adventures of Superman" -- on the radio. Cereal boxes, soup cans and a few throwback detergent containers aside, however, food packaging today -- especially fresh food -- can incorporate a laundry list of high-tech attributes. These packages can do everything from one-way breathing to monitoring temperature changes.
This isn't your mother's fish wrap.
"There's a significant technology component to packaging, and it's ever-changing," says Mike Conaton. He reels off various attributes of new-generation flexible plastic, in which the resin is extruded into multiple layers of ultra-thin film. Each layer is designed to perform a different task, from scavenging oxygen to blocking ultraviolet rays. "None of us think about it when we pick up a package of chicken," he says.
Conaton, who admits to getting excited about the latest iteration of a disposable coffee cup, is a managing director with Cyprium Investment Partners LLC, the Cleveland-based private investment firm. Cyprium, which changed its name from Key Principal Partners Corp. in 2011, has been financing middle-market packaging companies for more than a decade. Conaton himself is on the board of Imperial Bag & Paper Co. LLC. Key Principal provided $12 million in both debt and equity to a management buyout of Imperial in early 2007 and has helped underwrite several acquisitions since.
These days, Cyprium has lots of company. Packaging "is a favorite sector of private equity," especially those who play in the middle market, says Conaton. "There tends to be a lot of dealflow."
A few middle-market PE firms including Mason Wells Inc. and Nicolet Capital Partners LLC are practically packaging sector-specific, they're so focused on the area. Milwaukee-based Mason Wells, for example, did its first packaging-related acquisition in 1984, and senior managing director Greg Myers estimates the firm has acquired between 25 and 30 companies since.
Nicolet Capital, based outside Chicago, didn't set out to specialize, says Brett Snyder, its president, but found itself drawn in by numerous opportunities for both platforms and add-ons. They've done six deals in the past four years.
Nicolet Capital's latest acquisition came in March when it acquired a majority interest in the InterFlex Group, a flexible-packaging concern with operations in both the U.S. and Europe, which specializes in food. "This is a very large, broad market," Snyder says. "There are all kinds of angles."
It's easy to understand the appeal. Packaging is one of those decidedly unsexy economic activities that doesn't get a whole lot of popular attention, other than maybe negative environmental fallout. But it's a lot more than plastic bags or cardboard boxes. Packaging is ubiquitous, but also surprisingly dynamic, with lots and lots of product application nooks and crannies. In many of these subsectors, packaging is evolving rapidly, with nary a plain-vanilla envelope in sight.
"It changes dramatically segment to segment, application to application," says Silverio Davoli, a Milan-based partner with Italian M&A advisory services Cross Border Srl.
Davoli, for one, sees two opposite forces at work, both of which fuel M&A. Parts of the industry suffer from overcapacity, he says, with low margins and commodities-like price structures. Consolidation is one answer, and this is where the biggest industry mergers take place. Earlier this year, for example, British recycled-paper and cardboard-packaging stalwart DS Smith plc agreed to buy a rival, the packaging division of Sweden's Svenska Cellulosa AB SCA, for some $2.05 billion. The merger, still under review by the European Commission, would join Europe's second- and third-largest paper-packaging concerns.
At the same time, what Davoli calls "special segments" of the industry are the ones experiencing the most rapid growth. "That's where small companies have an advantage," he says. Acquisitions by larger concerns are becoming a favored way to quickly gain that requisite technical and market expertise.
The overall sector is huge. According to a recent study by London-based research and advisory firm Smithers Pira, the worldwide packaging market in 2010 totaled $670 billion, was projected to come close to $700 billion last year and was expected to balloon to almost $820 billion by 2016.
The sector itself has global giants, but it is also highly fragmented and can be surprisingly local. There aren't containers full of empty plastic bottles traversing the Pacific. With many applications of plastic packaging, "you don't have to worry about a company swooping in from China and offering the same cost per unit at 30% less," says Snyder. "It's not the sort of product where there's a quick change in suppliers."
On the other hand, the industry can be capital-intensive, and even the most successful midmarket companies need financial help to keep up. Snyder cites the growing demand in plastics packaging for flexographic printing, a high-speed press that uses flexible printing plates made of rubber or plastic. One flexographic press costs $4 million.
"The lower middle market, by definition, these types of companies are dynamic, changing all the time," says Cyprium's Conaton. "They need the kind of capital we provide."
To be sure, a few players dominate even in the most advanced parts of the industry. Snyder figures six companies control 70% of the flexible plastics-packaging market in North America. Leading the way is Australia's Amcor Ltd., the world's largest plastics-packaging company, with total revenue approaching $13 billion. Printpack Inc., Winpak Ltd., Berry Plastics Corp., Sealed Air Corp. and Sonoco Products Co. follow.
However, that still leaves ample room for others in the middle market, he continues. "There's a lot of consolidation, but a lot of opportunity for midsized players," says Snyder.
Myers estimates more than 400 flexible plastics-packaging companies of any note populate North America alone.
With some pockets of real growth and many other areas ripe for consolidation, both strategic players and private equity vie for platform acquisitions, bolt-ons and rollups.
"There's just a lot of M&A," says Louis Mitchell, a managing director with the investment banking division of Mesirow Financial Inc. "It's a good midmarket business."
According to P&M Corporate Finance LLC, another investment bank that focuses on packaging and tracks related deal activity, 2011 saw 114 plastics packaging-related M&A transactions. Private equity accounted for 48.
That kind of interest should continue, believes Andrew Petryk, a managing director at Brown Gibbons Lang & Co. LLC, a Cleveland-based investment bank. "We expect the most active players to be private equity in the next couple years."
Strategic acquirers can't be discounted, however. According to a Mesirow industry report, strategics executed the biggest deals last year in the packaging industry. New Zealand's Reynolds Group Holdings Ltd. led the way, with the $4.6 billion acquisition -- including the assumption of debt -- of York, Pa.-based plastic containers company Graham Packaging Co., beating out American rival Silgan Holdings Inc., based in Stamford, Conn. Three paper-related deals followed. Hartsville, S.C.-based Sonoco's $550 million acquisition of plastics packager Tegrant Corp. and Evansville, Ind.'s Berry Plastics' $360 million purchase of the closures division of Rexam plc rounded out the top six.
Major players have scrambled to build market share for years. However, strategies may be changing, according to John Hart, who heads P&M's plastics and packaging advisory services. These days, some of the big packaging companies are looking to acquire "high-quality niche businesses," as opposed to a former strategy of consolidating "high-volume commodity businesses," he says.
Hart cites as an example the late 2011 acquisition for $71 million of dispensing caps and closures company Polytop Corp. by Richmond, Va.-based MeadWestvaco Corp., a packaging and specialty-chemicals powerhouse whose revenue last year topped $6 billion.
"They're out there looking at more deals like that," Hart says.
The giants are on the prowl for new technologies, new niches and new geographies. Amcor, for example, announced in April that it had acquired for $40 million a specialist packaging plant in Mexico.
With strong interest by both strategic players and private equity, plentiful exit opportunities provide one of the attractions of the industry. "There are lots of opportunities to exit," says Snyder. "It's not a narrow universe of buyers."
There's one big exception: initial public offerings. Those that are listed on global stock exchanges tend to be longtime players. Even most private equity rollups are too small for Wall Street. So the proposed IPO of Berry Plastics has garnered attention. Berry filed to go public in March. Apollo Global Management LLC and Graham Partners bought the company in 2006 in a $2.3 billion leveraged buyout. The IPO is expected to raise up to $500 million.
While Berry has piqued interest in the industry, it's hardly representative of private equity-owned specialty, high-growth platforms, however. Berry is a large, diversified commodities-type concern. And the company is saddled with $4.6 billion in debt.
Packaging covers a lot more ground. The sector is easily divided into four materials: cardboard, glass, metal and plastic. Add to that labels and printing. The smallest marketplace is glass, and that is still more than $40 billion, Smithers Pira estimates.
When it comes to deal activity, not all materials are created equally. Smithers Pira predicts that both glass and metal packaging will lose market share in the years ahead. Glass, especially, is fully consolidated. "It's a declining sector," says Mesirow's Mitchell.
Some cans are remarkably sophisticated, with an ability to regulate temperature. However, most can companies are commodity players.
The same holds true with cardboard, although Smithers Pira data indicates cardboard is the single-largest material, with $210 billion in 2010, and will grow to $250 billion in 2016.
Plastics packaging represents the most dynamic part of the industry. Smithers Pira estimates that market at $274 billion in worldwide revenue in 2010. With apologies to Dustin Hoffman and "The Graduate," listen to enthusiasts and it really does sound like the future. They wax practically rhapsodic, especially about the growing sophistication of flexible plastic.
"It can reduce moisture, prevent odor. There are security fasteners, brand authenticity functions, so many different things going on in the industry," says Nicolet Capital's Snyder. Flexible packaging, he continues, sometimes takes on the attributes of "an arms race. Multilayer co-extrusion now reaches 11 layers. Each has a property that works to the ultimate benefit of the package."
What that can mean, say those who monitor and invest in the industry, is a particularly active market for companies that have proprietary technologies or highly specialized niche applications. "The vast majority [of packaging] is low tech, but there are a number of specific niches where technology is an advantage," says Davoli. That means, he says, "there are a number of small companies with superior technology that can compete with multinationals very well."
Davoli cites aerosol cans and wine bottle stoppers as two kinds of packaging in which advanced, niche manufacturers have flourished, making them targets of both private equity firms and larger packaging concerns.
In January, for example, the Luxembourg-based metal- and glass-packaging conglomerate Ardagh Group SA announced it was acquiring Boxal Group for €85 million ($109 million). With plants in the Netherlands, France and Switzerland, Boxal is widely considered a leader in aluminum cosmetics, beverages and pharmaceuticals packaging, especially aerosol containers.
Phillipp Schneider GmbH and Co. KG announced in March it had acquired for an undisclosed sum fellow German concern Pfefferkron and Co. GmbH, which specializes in stoppers, caps and artificial corks for wine and champagne.
The more aggressive private equity players are on the prowl for both platform acquisitions and add-ons. Los Angeles-based OpenGate Capital LLC, for example, has acquired three platform companies since 2008, all in paper-related packaging. "We're now extremely active in the identification of bolt-on acquisitions" for each, says Andrew Nikou, the firm's CEO and managing partner.
That aggressiveness can create a sizable player in a short period of time.
Take D&W Fine Pack LLC. Chicago-area private equity firm Mid Oaks Investments LLC created D&W in 2010 with the merger of three packaging-related companies. Since then, D&W has acquired another three. Its revenue now tops $400 million. "They're making a big play," says Hart.
Transaction values of many middle-market deals aren't publicly disclosed. Based on conversations with a number of investment bankers and private equity principals, multiples for packaging-related deals range widely, with no unanimity on an industry standard.
"If it's a commodity, like plastic bags, there's a much lower barrier to entry. So multiples tend to be lower, maybe 5 times [Ebitda] on one extreme," says Mitchell. "At the other extreme, you could see 10 times based on high growth potential."
Like many manufacturing concerns, 6 times Ebitda is standard, although 7 times is commonplace as well.
OpenGate, for example, is one of the few private equity firms that concentrate on paper-related packaging. According to partner Robert Lezec, it will pay between 4-1/2 and 6-1/2 times Ebitda for companies that he describes as underperforming but profitable.
Cross Border's Davoli, who represents both buyers and sellers in packaging-related deals, suggests even some specialty businesses attract only a 7 times multiple, but because their margins are higher, the purchase price as a ratio of revenue is much greater.
"Multiples have changed very little over the last three or four years," he says. "They are not very elastic."
Others disagree with him. "Pockets of packaging have really, really high growth," says Mitchell, and those are reflected in high multiples.
In P&M's latest report, one large public deal stands out as well. In March, Dart Container Corp. bought Solo Cup Co. for $958 million, merging America's second- and third-largest thermoform container makers. That's a 9 times Ebitda multiple, P&M figures.
As parts of the sector heat up, secondary private equity deals are creeping in as well. Witness the April acquisition by Berwind Corp. for an undisclosed amount of Mason Wells portfolio company Oliver Products Co., which supplies packaging to both the food industry and medical devices. Some of those following the industry believe Berwind paid as much as 10 times Ebitda. One investment banker called it "a tremendous exit."
Mason Wells' Myers would say only that it was a "very nice transaction."
Oliver occupies a prized spot in one of the sector's most profitable and highest-margin niche: medical-device packaging. The Grand Rapids, Mich., concern enjoys a loyal, but demanding and exacting, client base. It holds patents and proprietary technology that, Myers says, is difficult to reverse-engineer. That includes the ability to test a device without opening the package.
What's more, he continues, margins are understandably higher with a package that must work or "you can kill the patient. ... With a $2,000 stent, you're not going to worry about the cost of a package as much as a 50 cents pack of chewing gum."
According to Myers, Mason Wells considers companies with $50 million to $250 million in revenue and Ebitda ranging from $6 million to $30 million. Many of the firm's targets are family-owned businesses.
Private equity and strategic acquirers alike are on the hunt for proprietary technology and cutting-edge innovation. That includes thinner plastic, which cuts cost and resonates environmentally. "To structurally design a bottle that can hold up with 20% less plastic isn't simple or straightforward," says Myers. "There's a lot of technology associated with that."
Acquisitions provide a much faster way to gain a technological edge than starting from scratch. "There's much more pressure now on packagers to find new solutions for their clients," says Davoli.
InterFlex, a food-packaging concern with plants in both the U.S. and U.K., fits many of the attributes private equity seeks. It is profitable, and growing rapidly. Revenue is approaching $150 million, so it's comfortably in the middle market.
Nicolet's acquisition of the company, based in Wilkesboro, N.C., exemplifies a PE buy and a company's motivation to sell as well.
According to InterFlex chief executive Stephen Doyle, Mitsubishi Corp.'s private equity arm, Red Diamond Capital, took a 45% stake in his company six years ago. Red Diamond went on to bankroll two InterFlex acquisitions, one of which boosted its presence in Europe, the other in the U.S.
However, Red Diamond wanted to exit. Nicolet liked what it saw and came in with roughly a 75% stake. Terms were not disclosed.
Doyle, whose background includes private equity, believes that kind of financial sponsorship makes sense on both sides. "Private equity is looking for a reasonable level of returns and margins, at lower volatility," he says. "Food didn't suffer as much in the downturn. It's recession resistant, with a low beta and a low risk profile. And it's very financeable because of a consistent revenue stream."
InterFlex, in turn, needs the financial partnership to help it grow.
"We've done three acquisitions over the past 10 years. We'll be back out again now that we have a new investor," Doyle says.