Concentrate to succeed

Nicholas Mockett, of corporate finance house Moorgate Capital, discusses the drivers for merger and acquisition activity in the packaging market

 

The industrial economics behind merger and acquisition (M&A) activity in the packaging market is primarily driven by the sector’s concentration level, with lower levels offering a bigger opportunity to buy and sell.

 

The package printing and converting industries are less concentrated than the suppliers and buyers that sandwich them and, by applying some Porter’s Five Forces mentality, you see that its relative power in the supply chain is weak.

 

Porter’s Five Forces is an analysis and strategic development model that uses a framework featuring five elements that influence an industry’s profitability and competitive intensity. The five forces are rivalry, the threat of substitutes and new entrants to the market, and supplier and buyer power.

 

As such, the high level of concentration and consolidation in those markets that supply package printing and converting businesses, and their customers, puts pressure on such packaging producing companies.

 

M&A and consolidation in an industry, such as those producing packaging, can help address this balance of power.

 

There are other reasons for M&A activity, including a company growing its geographic footprint, extending technical know-how, acquiring complementary products or clientele, entering new segments or niches, and defending an existing position in the face of potential competition.

 

Furthermore, the availability of debt and equity drives M&A, and there are private equity funds with money to deploy.

 

Most segments of the packaging industry have very low industry concentration levels compared with other similar industries. The exceptions are glass and metal, which are more concentrated, probably reflecting the maturity of the product and the capital intensiveness of the process.

 

These types of product tend not to be heavily printed and form part of the label market supply chain, whereas flexible and fiber-based packaging are more integrated with print.

 

The reasons for a company being put up for sale are varied.

 

From time to time, the shareholders of a business decide to sell. This may be a family which has built up a packaging empire where the next generation does not plan to continue, or it may be a financial sponsor or private equity house which has held a packaging asset for a period of time.

 

It may even be a multinational company that has seen its strategy evolve and a subsidiary become a non-core asset.

 

Typically, these vendors will appoint an investment bank to identify the right home, often, but not always, the one willing to pay the highest price.

 

Many investment banks will adopt a scatter gun approach, where a bank puts together a document and broadcasts it to dozens of parties. In some case, this can result in the rationale for discussing the potential business combination being tenuous.

 

The suggested benefit of this approach is that the bank can tell the vendors that the company has been widely marketed and that the price received is market price. The risk is that the company becomes soiled goods. It’s likely many competitors will have seen its trade secrets and it’s also likely that customers and suppliers will have heard the gossip about the mooted sale and become nervous.

 

This can result in a price chip, or loss of value. It’s also hugely embarrassing if the deal doesn’t actually happen.

 

An alternative investment bank approach will capitalise on deep knowledge of the strategic value drivers for the industry players or buyer population and run a tight confidential process where the strategic fit is articulated to a select few to make it a compelling deal.

 

Those looking to find buyers or sellers should choose carefully which approach to adopt. Bankers who know an industry intimately, particularly over a period of years, are more likely to have the contacts and knowledge to originate the much coveted “off-market”, exclusive deals, bringing the most compatible parties together, and negotiate the complexities of the deal without becoming distracted by “non issues” for packaging companies, which may be relevant in other industries.

 

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