Packaging’s positive attributes of steady growth, recession resistance, scalability, and innovation have created a healthy and highly competitive supply base. Within this environment, M&A activity has continued to increase while used as a strategic tool to grow above industry averages, gain new technologies, penetrate end markets, and to capture synergies as packaging evolves and consolidates. PMCF has been pleased to support packaging M&A (with 19 transactions in the last 5 years) and provide useful industry information and analysis including via our newest, dedicated publication the Packaging M&A Pulse.
In 2015 packaging market factors of note included steady demand, favorable input costs, high levels of available debt (at low interest rates), strong corporate balance sheets, and an oversupply of aggressive strategic and private equity acquirors. Not surprisingly perhaps, plastic, paper, glass, and metal packaging segments experienced increased M&A activity in 2015, with total deal count up significantly over 2014 levels. In total, 2015 resulted in 269 packaging transactions compared with 234 in 2014, a 15% increase in deal volume. Further upside to deal volume was likely hampered only by available targets to purchase.
Sellers were well aware of this imbalance and valuations in 2015 responded accordingly. PMCF’s data shows that EV / EBITDA multiples for completed transactions reached their highest level in 5 years. Public packaging equity valuations reflected a similar trend with all four packaging indices trading at or above their 3 year average for EV / EBITDA. With other assets returning extremely low returns, capital flowed to packaging’s attractive long term attributes.
While all areas of packaging are generally finding strong buyer interest 2015 activity was driven specifically by rigid plastic packaging and paper related packaging. These two sectors experienced substantial growth in transaction volume for 2015, with the number of deals in these segments growing 30% and 21%, respectively, compared to 2014 volumes. The supply base in these sectors remains fragmented, in particular for corrugated packaging within the paper sector, which we believe is one key driver.
Private equity also remains a major factor in increasing packaging M&A. Investors have generally allocated capital to the investment funds at a faster rate than can be deployed explaining their aggressive postures. 2015 did reflect an easing in the available amount of debt per transaction, which is likely to temper their valuations somewhat. This will not eliminate private equity as buyers, but rather may serve to keep valuations in 2016 flat or slightly lower for all buyers.
2015’s robust activity levels reflect a strong M&A environment in packaging and what is generally agreed to be a “seller’s market.” We’ve received numerous inquiries as to whether the M&A market has peaked and when we believe it will start to decline. Our current view is M&A in packaging will remain active in 2016, despite potential economic and political headwinds, given the sector’s historical resilience and the continued fragmentation among the supply base.