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Plastics Industry Snapshot

Strong Demand for Transactions Leads M&A Volume & Valuations

Positive transaction metrics in the plastics industry are keeping the sector attractive to buyers and sellers. Strong M&A activity throughout 2015, especially in the second half, reflected high valuations, a classic competitive landscape of more buyers than sellers and favorable credit markets. With no signs of significant change in these underlying drivers, investors and sellers can expect a similar landscape in 2016.

Plastics M&A Activity

Even with differing levels of momentum in various sectors, there was continued overall strong demand for plastics companies across all end markets and manufacturing processes, and positive momentum going into 2016. Overall plastics M&A volume increased 6.5% in 2015, while second half activity was up 17% year over year.

Specifically, transactions were up in the following end markets and processes: plastic packaging, industrial plastics, injection molding, thermoforming, machinery, and materials. The medical and automotive sectors experienced declines but not for lack of demand, especially for medical. Private equity buyer activity was up while strategic buyer activity was flat. International transactions were up while U.S. and cross-border deals  were down.

Plastics Industry Multiples
Valuation multiples continue to be at multi-year highs across each of the plastic end market sectors. Among end markets, medical multiples are up and continue to be high. Despite recent volatility, most U.S. market stock indices and plastic industry sectors remain near all-time high levels. For 2105, the Dow Jones Industrial Average and S&P 500 were down approximately 2%  and 1%, respectively.

Capital Markets
Transaction volume benefited from continued favorable credit markets and an abundance of equity capital for both small and large transactions. Private equity firms have significant funds available for transactions and strategic buyers have high cash reserves. There’s a general imbalance in transaction volume due to more buyers than sellers. Historically low interest rates remain despite the recent increase in the federal funds rate. Cross-border transaction activity was likely slowed by the strengthening of the US dollar against the euro.

Plastic Industry Dynamics
Even in traditionally cyclical sectors, the plastics industry retains a positive outlook for most end markets. The housing market is showing strong momentum and automotive volumes are at or near record highs. Crude oil prices decreased approximately 30% during 2015, from $53 to $37 per barrel, while natural gas saw a 23% decline. Many resins saw price declines during 2015, although commodity resins typically have more pricing volatility versus lower volume, highly engineered resins.

Plastics continue to become more cost effective and advantageous as compared to traditional materials such as metal and wood. Plastics continue to represent a larger percentage of overall products in many industries and remain a key material for OEMs seeking weight reduction and design flexibility. The domestic plastics industry has also become more competitive relative to certain low-cost country alternatives, particularly when factoring in quality, production flexibility, and customer service. Importantly, many processors are seeing an increase in the number of re-shoring opportunities.

Looking Ahead

  • There is strong buyer demand for plastics companies across all end markets and manufacturing processes as indicated by a 6.5% increase in plastics M&A volume during 2015.
  • Plastics companies remain highly attractive across multiple sectors, from medical to automotive, packaging and various types of industrial products.
  • The domestic industry has become more competitive with many processors, particularly injection molders, seeing additional re-shoring opportunities.
  • Coming into 2016, M&A momentum in the plastics industry is on the upswing, with second half 2015 volume increasing 17% year over year.
  • More owners and private sellers are coming to the table. In 2015, they took action to sell in greater numbers. That trend is expected to continue.

Macroeconomic and manufacturing indicators are also positive, which lend additional support to an overall positive outlook for activity in this industry. A deeper dive reveals insights and data points important to participants within the plastics industry.

To view the full report and corresponding data, please visit: http://www.srr.com/assets/pdf/winter-2016plastics-industry-snapshot.pdf.