US trade tariffs among factors driving M&A in flexible packaging, experts say
- Aluminum components for packaging at issue
- US firms seeking international partners, targets
- PE firms see potential for rollups
US tariffs on imported aluminum are expected to drive additional M&A activity in flexible packaging, a hot-growth sector that was already seeing considerable dealmaking, experts say.
According to Alison Keane, CEO of the Flexible Packaging Association, the 10% tariffs on raw imported aluminum, and other duties on Chinese goods like aluminum foil imposed last year by the Trump Administration, have prompted some US companies to circumvent the duties by looking outside the US for partnerships or acquisitions. That’s because manufacturing packaging outside the US bypasses the tariffs on imported raw materials.
“If you've got a converting facility or partner in Canada, Mexico or even in China or Europe, you’re moving that business over there to escape the tariff on aluminum foil,” she said. And while the new NAFTA may result in a resolution with Canada and Mexico, trade with China could be affected “for a very long time.”
“For the US-centric companies, if they don’t already have a partner [internationally] then they are looking for partners and that may mean a complete merger or some type of contract,” she said.
Keane pointed to October’s three-way merger between Chicago-based flexible packaging producer Rollprint Packaging Products, Singapore-based Alliantz Flexible Packaging and Ireland-based EuroFoil Teo to form a new global company, Paxxus, as a sign of things to come.
Barry Freda, CEO of New Jersey-based World Wide Packaging, a manufacturing of cosmetics packaging, said the tariffs have altered his strategy. The company now plans to acquire an airless packaging business either in Taiwan or South Korea due to the import tariffs on Chinese goods.
“Tell me what Trump’s going to do and I’ll tell you where we want to be,” he said. “If the tariffs go away, then I want to be in China. If they don’t, then I want to be somewhere else.”
WWP manufactures a large portion of its flexible and rigid packaging in China and generated over USD 200m in revenue in 2018.
Flexible packaging is manufactured using paper, plastic film, foil or a combination of the three. It is used in both consumer and industrial products and includes products such as rollstock, bags, pouches, wraps, shrink sleeves and stretch film.
Fast US growth attracting M&A interest
Tariffs aside, the US flexible packaging industry remains ripe for consolidation owing to the huge number of both independent and private equity-backed companies operating in the space.
“It’s become a very hot area over the last five years and I think quite frankly it needs some M&A,” one industry investment banker said. “There’s no question that folks have done it -- and they’ve made money doing it -- but it needs to happen some more.”
Keane estimates flexible packaging generated almost USD 31bn in revenue in 2017 from 400 companies. The sector accounts for around 80,000 employees with around 70% of these located in the Midwest. As the second largest packaging segment behind corrugated, accounting for 19% of all US packaging, it is also the fastest growing, which in itself is attracting M&A interest.
“M&A will definitely continue,” Keane said. “It used to be the big companies buying the small companies but now we’re seeing the big companies consolidating too.” In August last year for example, Bemis [NYSE:BMS] announced that it would merge with Swiss-Australian packaging group Amcor [ASX:AMC] in a USD 6.8bn all-stock transaction.
Meanwhile, Keane named companies such as printing firm TC Transcontinental [TSE:TCL.A TCL.B], The Carlyle Group-backed Novolexand Ohio-based ProAmpac as likely to continue consolidating the space. She added that M&A will also be driven by packaging firms in other segments looking to get into flexible packaging.
However, the banker noted that the pushback against plastics and consumer and company focus on sustainability could have a negative effect on the space.
“As more people move away from plastics back to paper, I think paper-based packaging, which is recyclable and environmentally friendly is likely to be the biggest beneficiary of that,” the banker said.
Private equity firms wrapping up packaging
Flexible packaging also continues to receive healthy interest from PE firms, Keane said, due to growth opportunities driven by high demand for premium dog and cat food, health foods, and the dairy industry. She named The Carlyle Group as an active player in the space likely to continue acquiring going forward.
According to Scott Finegan, managing director at Chicago-based PE firm Pfingsten Partners, the overall packaging space remains attractive owing to its roll-up potential, high multiples and growth opportunities.
“The packaging area in general is a very stable investment not prone to huge drops during recessions,” he said.
In 2016, Pfingsten acquired Oliver Printing & Packaging together with industry veteran Brian Dunsim. In December, the firm acquired a folding carton and pressure sensitive label supplier, Hauppauge, New York-based Disc Graphics, its second acquisition for the platform. It is seeking additional acquisitions in both pressure sensitive labels and folding cartons, but is also separately looking at flexible packaging for a potential new platform.
“It’s an area of interest with probably higher growth than folding cartons and we’ve been looking in that direction,” Dunsim said.