Merger and acquisition (M&A) activity in the packaging sector experienced a significant increase in 2022, despite a decrease in transaction volume in the broader middle market. This growth in M&A activity primarily can be attributed to several key factors:
- resilience and stability of the packaging sector
- increased demand for packaging solutions driven by the rise of e-commerce
- continued expansion of global trade, and the growth of emerging markets
In this interview, Scott Daspin, director of investment banking at Triad Securities, and Paul Marino, head of the Private Equity Group at Sadis & Goldberg, share their expertise and insights on the past developments in, current state of, and prospects for the packaging sector. Both offer extensive industry knowledge and experience – Daspin has a productive history of developing new relationships and identifying and closing successful transactions, and Marino focuses his practice in matters concerning financial services, corporate law, and corporate finance – and provide valuable perspectives on the trends in the packaging sector and their implications for future M&A activity.
Q. Private equity led the way in 2022 – accounting for nearly 54% of deals in the packaging space. Why do you think this was the case?
Marino: In an era of space exploration and artificial intelligence, it is somewhat surreal to think that there is a growing industry that would have been familiar to the first Sumerian priest-king of Babylon in 3000 B.C.: containerization. Given the continued importance of packaging, it’s no surprise that smart money is and always will be attracted to this sector. Many of the middle-market operators are family-owned, which lends itself to improved efficiencies. Investors recognize the value and potential for growth in an industry that serves a wide range of industries, from food and beverage to consumer goods and pharmaceuticals.
Q. Are there any strategies that private equity firms are using to create value and achieve growth?
Daspin: Private equity firms have left their mark on the packaging sector by using the “buy-and-build” strategy. This involves acquiring a portfolio of companies, within the same or related industries, and then integrating and consolidating them to create a larger, more efficient, and competitive business.
Due to the fragmented nature of the packaging industry, where there are many small- to mid-sized players but few large players with scale, investors can acquire multiple companies and integrate them to achieve greater economies of scale, reduce costs, and produce higher profit margins.
Q. It has been said that 2023 will test the notion that the packaging industry is recession-proof. Do you agree with this assessment? What are some trends to watch?
Marino: Newton’s Third Law of Motion states that “For every action, there is an equal and opposite reaction.” This concept is analogous to business cycles. Over the past two years, post-pandemic over-exuberance has been balanced by a deeply pessimistic outlook for 2023.
However, macroeconomic uncertainty has the potential to significantly impact the packaging sector in the coming year. In light of ongoing political tensions, shifts in global trade policies, and an uncertain economic landscape, many companies may choose to delay investments and reduce spending on packaging. This could lead to a slowdown in the demand for packaging materials, affecting the growth of the industry. Additionally, if businesses begin acting cautiously toward their budgets, there may be a shift toward cost-saving packaging solutions, which could challenge the innovation and development of new packaging technologies.
Nevertheless, history shows that the packaging sector should remain resilient. The rapid growth of e-commerce and the resulting increase in home deliveries will drive demand for innovative packaging solutions that can protect and preserve products during transportation. Moreover, as consumers become increasingly conscious of the environmental impact of packaging, demand for sustainable packaging materials and solutions will grow. And the continued expansion of global trade and the growth of emerging markets will create new opportunities for the packaging industry to serve a wider range of customers and industries.
Q. Can you walk us through some of the deals that you worked on over the past year? Were there any common threads?
Daspin: Most of my packaging deals involve family-owned businesses that are both profitable and financially self-reliant. The typical owner is either looking for a way to transition to retirement or simply to find an opportunity to liquidate – sellers often have 85% or more of their net worth tied up in their business.
It is interesting to note that the highest bidder is not always the best solution: sellers often prioritize working with buyers who will continue to maintain operation of their company beyond the sale. For example, sellers will often turn down a higher initial bid from a financial buyer in favor of working with a private equity-backed strategic buyer offering a less competitive valuation but with an opportunity to invest some of their equity back in and remain actively involved in the company, with a path to succession planning. As a result, much of my time on a transaction is spent trying to match the desired outcome of the seller with those of the buyer that meets those criteria.
Q. The trend of more states enacting extended producer responsibility laws continued in 2022. Can you tell us about these laws and what they mean for packaging companies?
Marino: Following the actions of their counterparts in Oregon and Maine in 2021, legislators in California and Colorado enacted EPR laws designed to help reduce waste from packaging and containers. These bills, though not entirely identical, require large producers of packaging and containers to take responsibility for the costs associated with collecting and disposing of their products. Also, they set targets to encourage producers to use more sustainable packaging and materials. Most of the new laws also require companies to provide information about the recyclability of, as well as provide collection systems for the recycling of, their packaging.
Q: What advice do you offer to a potential seller post-closing?
Daspin: Mainly, I make sure they understand their role in the company going forward and what their responsibilities are to the buyer. Some business owners may never have worked for anyone before, so they might need to take some time to understand the new corporate structure or reporting requirements. Also, because the employees of the company are not typically aware of the transaction until closing, I recommend they take some time to understand how the outcome of the sale will affect their people. They should also know how to communicate to vendors and customers post-transaction. One successful trend I’ve seen is extending announcements by 20 to 30 days, so the seller can communicate their messaging before their stakeholders hear it from other sources. I think it’s important to know what your messaging will be and what you’re allowed to say to employees, clients, and vendors.
Q. Are there any legal concerns that must be negotiated in order to arrange a smooth and successful acquisition or sale of a packaging company?
Marino: The purchase and sale of a business are the most important transactions a business owner can undertake, rivaled only by initial organization or liquidation. The combination of drastic change for all the players involved with financial and legal due diligence gives these transactions their characteristic drama and complexity. While not unique to a packaging transaction, several items, such as customer, vendor, and employee contracts, deserve increased scrutiny in the process of purchasing a packaging company.
Note from the author and interviewees:
These materials have been prepared and circulated for general information only and are not intended to provide recommendations with respect to any security. The information and opinions contained in these materials speak only as of the date of receipt of these materials and are subject to change without notice. Investors are cautioned that statements regarding future prospects may not be realized and that past performance is not indicative of future results. These materials do not constitute an offer, or a solicitation of an offer, to buy or sell any securities or other financial instruments. Nothing in these materials constitutes or should be construed to be accounting, tax, investment or legal advice. Additional information regarding the contents of these materials is available upon request.
Triad Securities Corp. is a registered U.S. Broker Dealer, member of SIPC, FINRA and licensed with various state securities regulatory authorities.