Proving that you can go home again, the tech-burned LBO market is beginning to rediscover a number of Old Economy industry sectors that had been long forgotten amid the networks and the semiconductors.
One such area is packaging, a fragmented sector ripe for consolidation given its plethora of privately-held mom-and-pop operations with steady cash flows, good growth prospects and low valuations.
Packaging is defined as anything used to enclose or encompass an item for end-use consumer goods consists of sectors such as injection molding, flexible packaging and the more traditional corrugated packaging. The injection-molding sector uses plastic materials to assemble and enclose products for the end-user markets such as health and beauty care. The flexible and film sector provides packaging services to the food and beverage and medical industry, while the corrugated sector produces corrugated containers, more commonly known as cardboard boxes.
According to data provided by private equity firm Mason Wells Inc., North American packaging is a $140 billion per year industry. The corrugated packaging sector leads the way generating $27 billion to $29 billion in annual revenue, followed by the flexible packaging sector at $20 billion, and the injection molding sector generating $3.5 billion per annum.
Good Deals in Big & Small Packages
A number of buyout firms have already begun their packing investment activities
For example, Saunders Karp & Megrue‘s platform company Applied Tech Products has nine companies under its umbrella that operate in the rubber and plastic injection-molding sector. The platform recently completed the acquisition of UPT Plastics, which is an injection molder of precision plastic components, and Owens Packaging.
One of the year’s most notable packaging deal was Chase Capital Partners‘ $1.065 billion buyout of Huntsman Packaging Corp., a manufacturer of plastic films and flexible packaging used to wrap food and consumer goods. Chase Capital, now known as J.P. Morgan Partners, also has several other packaging companies in its portfolio, including Aerosol Services, an aerosol and non-aerosol packaging company; Berry Plastics, a manufacturer of injection-molded plastics, Xpander Pak Light-weight, a manufacturer of packaging materials; and Stull Closure Technologies, a provider of functional plastic closures for use in consumer goods.
“You have a couple of large players in the industry, but you still have a lot of small-and-medium sized companies,” said Rick Waters, a partner at Chase Capital. “There will continue to be consolidation where our portfolio companies will be able to make add-on acquisitions or sell to other consolidators.”
Tim Walsh, a partner at Chase Capital, said follow-on acquisitions of portfolio companies is generally less than seven times earnings before interest, taxes, depreciation, and amortization.
Ray Langton, co-founder and chief executive officer at Applied Tech Products, which targets the plastic injection molding, thinks his firm is in a good position to consolidate plastic packaging companies. “You have four or five very large companies in this sector and then you drop down fairly quickly to companies that are much smaller,” he said.
Other buyout shops recently having made investments in the industry include the Halifax Group and Graham Partners Investments LP. The Halifax Group last July acquired National Packaging Solutions Group Inc., a manufacturer of corrugated and other packaging materials, for $70 million, and Graham Partners last February committed capital to acquire a majority stake in National Diversified Sales (NDS), a manufacturer of plastic irrigation and drainage. Graham Partners joined forces with Brera Capital in March 1999 to acquire a majority stake in Western Industries, a manufacturer of molded plastic packaging company, for an undisclosed amount.
Also, Castle Harlan Inc. last month acquired Associated Packaging Enterprises Inc., a manufacturer of specialty packaging catering the frozen foods industry, for an undisclosed amount. This is Castle Harlan’s second portfolio company in the $140 billion packaging industry. Its first foray was the acquisition of StackTeck Systems Inc., a plastic injection mold-maker, in October 1998.
Debt & Equity Packages
Lenders also like the sector for the same reasons as do private equity firms.
“It is generally viewed by lenders as a good industry because it has good cash flows, growth prospects, a balance for industrial business and a stable end-consumer market,” Walsh said.
In addition, many owners of packaging companies are reaching retirement age and want to exit their businesses by selling to strategic buyers who have experience within the industry.
“Packaging and machine tooling companies came out of the World War II era, and a lot of people are getting close to retirement and looking for succession,” said Chris Barrens, a general partner in Chase Partners’ mezzanine group. “Owners looking to retire like the idea of their company being sold to a private equity shop that can continue the legacy, rather than selling to a large conglomerate.”
Hung Tran can be contacted at