Based on an exclusive AIMCAL Business Webinar presented last week, this post presents data and opinions from Mazzone & Associates managing director Jonathan White, who spoke on “Mergers & Acquisitions in the Converted-Web Value Chain.” White also addressed the timely issue of how the COVID-19 pandemic may impact packaging and converting-industry M&As in 2020 and beyond.
Here are some Converting Curmudgeon
- “We’re in a recession. The only questions are how deep and how long it will last.” Goldman Sachs projects US real GDP will have fallen to -6% in Q1 2020 and perhaps as low as -24% in Q2 2020. Growth scenarios from The Conference Board suggest that if the US economy can reboot next month already, 2020 will still be down to -1.6% compared to last year; a summer “V” curve means a decline to -5.5% this year versus 2019.
- History shows that, during The Great Recession, the volume of M&A deals fell 30% from 2007 to 2009 but just as quickly rebounded and grew another 10% from 2019 to 2011. Fortunately, packaging and converted-web industries have been mostly resistant to the more-recent drop in industrial M&As since 2015, despite steady GDP growth of about 2% a year.
- Valuation multiples have ricocheted up and down since 2017 for public packaging companies in recorded M&As. So far in 2020, multiples have fallen from 11.1x to only 9.0x, but it’s better than other industries. “I never thought I’d say a 20% decline is okay, but that’s the reality of where we are today.”
- Opinions vary widely about how bad the pandemic-caused recession will be for enterprise values of packaging and web-converting businesses. One private-equity firm survey shows that 55% of respondents think values will fall 10-25%, and about an equal number (18%) think values will drop either only 0-10% or up to 25-50%.
- Good News ahead is that web-converting and packaging are typically more resilient than other industries, and once we’re out of a recession, rebounds are typically quick. Converters’ net debt is favorably much lower (only 0.9x EBITDA) compared to equipment or raw-materials makers. “We are much better positioned to weather the storm of the recession and the liquidity crunch we’re facing over the next several months.”
- When the pandemic has subsided, packaging converters will really need to solve the problem of too much reliance on a foreign supply chain. The world’s largest 1,000 companies or their suppliers owned 12,000+ facilities in COVID-19 quarantined areas back on March 2. This included 1,100+ plants in China and 210 in Italy for consumer goods makers. “This was before things got really bad. That is far too much of a concentration.”
- As for reconstructing the supply chain post-pandemic, companies must monitor on an ongoing basis their diversification of where stuff is coming from, thus raising the profile of near-shoring products from Mexico for the US, and Turkey for Europe. For M&As, buyers will be putting this on their due diligence list – how a purchase target can persevere in a fragile global economy.