Consolidation in the plastics industry continued as 2018 led to the second-best year for plastics M&A since 2010 at $34bn in transaction value, a $12bn increase over 2017. Although total transaction value was up over 2017, the total number of transactions fell slightly. M&A is expected to continue at a robust pace in 2019, despite a variety of mitigating factors.
Higher interest rates, the fading effects of U.S. tax reform, U.S.-China trade tensions and an economy that is expected to grow at a slower pace are all impediments to plastics M&A in 2019. In addition, recent stock market volatility may give investors pause. Despite these factors, the cost of capital remains relatively low and the economy is still strong, creating a favorable backdrop for M&A in the plastics sector.
The plastics sector will be driven by continued strong end-market performance as consumer spending is expected to rise; however, this impact will be curbed somewhat by a pullback in construction and higher prices for plastic resin and plastic materials. Furthermore, innovations in the industry, such as advances in biodegradable polyethylene, are currently being developed and are expected to be a source of growth in the future.
The draw of private equity interest in the space is expected to continue unabated as firms seek new platform opportunities and growth through add-on acquisitions. In 2018, PE firms were involved in 46% of plastics and packaging deals, well above the 2013 to 2017 average of 37%, according to Plastics News. Interest from domestic strategic buyers will be driven by a need to reach scale as they compete against international plastics manufacturers that are supported by a lower cost of labor and a strong dollar. Moreover, the high level of competition in the industry makes it difficult for companies to achieve organic growth above GDP; M&A continues to be an attractive means for achieving growth.
While plastics M&A for 2019 may face some headwinds, we expect the number of transactions during the year to track closely to 2018’s results. In addition to continued strength from the economy and appetite from investors, multiples paid in M&A transactions, which may have peaked in 2018, are expected to remain at elevated levels and will likely bring more sellers to market, creating a unique environment that will make for another active year in the plastics industry.
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