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Selling for top value

Bob Cronin of The Open Approach on how to leverage the six factors which accelerate buyer interest.

Bob Cronin of The Open Approach on how to leverage the six factors which accelerate buyer interest.

Tradeshow season is always an exciting time. Not only can we view all the new technology, we also network with our colleagues and constituencies. While there are fewer new companies joining the label and packaging space, there are more players than ever. Venture capitalists, private equity firms and print strategics, to name a few, have moved into our category, and are hungry for acquisitions. This means ample opportunities to grow our businesses or exit them profitably. Indeed, the surge in investors – big and small – is adding an exciting new dimension to our landscape. 

While global M&A declined in 1Q 2019, label and packaging transactions have remained steady – at attractive multiples. Good-performing companies are attaining a five to 12 multiple of adjusted EBITDA, depending on their segment and M&A advisor. And significant deals continue to be made. 

So why is our industry in such great demand? Here are the top six we see as the most influential.

1. Industry fragmentation. The label and packaging industry remains highly fragmented. There are numerous small and medium-sized players spread out geographically, addressing different parts of the market. It’s a universe where major players affect, but don’t dominate, territories and regions. While relationships (and great local service) are still the key decision factors, customers will sway to competitors for a notable improvement in purchasing power or sourcing.

Fragmentation interests investors because of the rollup potential. With more investor money – and demand for strong returns – private equity firms are challenged to find actionable targets. Bringing together several good, small players can yield one significantly great operation. This model has proven to be successful for investors and acquired companies alike. 

2. High growth rates. While you might not be impressed with label and packaging’s average 2-7 percent annual growth rate (because you’re used to it), it shines like a diamond when compared to other venues. The industry also boasts very attractive profitability.

What’s more intriguing is that we’re constantly innovating. And this innovation, and ensuing growth, is being propelled by multiple forces. 

Pushed by customers, we’re growing from more ‘chain of custody’ and compliance needs such as anti-tamper labeling and tracking. These entities also bring new business from brand extensions and personalized packaging (think Bud Light’s ‘team’ cans and Frito-Lay’s faces on potato chip bags). Then, advancements in manufacturing, such as those seen in digital and inkjet labels at Labelexpo shows) are creating new production efficiencies and game plans. All these elements fortify investor interest.

3. Resilience to market downturns. Another benefit of the label and packaging industry is that it has performed well during difficult times. When the economy has been under pressure, our space has demonstrated better statistical performance than overall markets. People still need to eat, drink and ship, regardless of economic scenario. This provides greater confidence in leveraging the financing of the new entities. Those attributes are not available in most other investment segments.

4. Proven success. The last two decades have been extremely favorable for investors in our industry. Numerous lucrative plays have been made, and many more continue to prove out. Nothing is better than a proven thesis to generate additional interest. Call it ‘bandwagon thinking’ but we have more investors in our business than ever. 

Since many larger plays have ultimately been wrapped up by a public entity, there are a lot of well-publicized stories. This helps deals perpetuate. With the ability to look at past successful models, new investors can replicate workable strategies and get their models off the ground quicker.

5. Synergies with platform companies and other investments. There are significant synergies based on scale, geography and buying power that can be gained through acquisition. During a recent due diligence project, we developed a list of synergies across multiple target platforms and forecast what could be accomplished by leveraging multiple smaller operations into the larger parent. The opportunities today are still valid within the correct market structure.

Investors in our businesses can also gain synergies they can put to work in the supply chains of their other portfolio companies that use labels and packaging. If they have wine, beverage, consumer goods or pharma investments, these synergies can be huge.

6. Customer demand. Every business grows alongside the demands of the consumer. The explosion of private label brands, allergy-sensitive and organic product surges, and more ‘on-the-go’ and single-serving-style offerings (part of the boom behind flexible packaging) are extending the possibilities for label and packaging players. Customer demands for information also are expanding our terrain. Innovations such as smart labels and new sustainable packaging materials are just a few of the growth paths. 

Customers are always seeking new ideas and better ways to solve challenges. Count on even more products that will need to be packaged, decorated, labeled and shipped. And count on even more clever visual and tactile solutions (color-shifting foils, thermal transfer ribbon) to take shape.

As you examine these six drivers, it’s obvious that none of them will abate any time soon. We can expect M&A activity to continue, and likely accelerate. 

So what does that mean to you? Every company will ultimately be a buyer or a seller. Planning for that option now will ensure your future success. Consult with your leaders and advisors on your best trajectory, then plan steps to best lead you there. 

Ours is truly an exceptional industry. But you sell your business only once. Embrace these six drivers as they lay out the new landscape. Then make the plan that leads you to your greatest reward. 

This opinion was first published in issue 3 of Labels & Labeling magazine. 

ABOUT THE AUTHOR

Bob Cronin is a regular columnist in Labels & Labeling, writing about M&A activity in the industry.

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