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FLEXO Magazine : February 2008
26 FLEXO FEBRUARY 2008 www.flexography.org Packaging Acquisitions Year in Review Led by an incredibly strong first half of the year, 2007 turned out to be a blockbuster year for packaging merger and acquisi- tion transactions, according to a report, Packaging Perspectives, produced by Mesirow Financial Corporate Investment Banking. In fact, only in 2005, when total global dollar value of announced transactions included the $24 billion Koch Industries acquisition of Georgia-Pacific, did merger and acquisition activity outshine that of 2007. The significant level of deal activity did reach record levels in 2007. There were several noteworthy reasons for this: accom- modating credit markets; stock market valuations that rewarded acquisition activity (certainly in the first half of the year); a favor- able exchange rate environment (U.S. assets were on sale); and perhaps most importantly for many global packaging participants, growth through acquisition remains a key strategic initiative. Not surprisingly, the impact of private equity was again per- vasive in 2007. A growing percentage of packaging merger and acquisition transactions were completed by private equity groups. Not withstanding the present tight credit markets, the report states that private equity groups will continue to invest in packaging. The industry remains attractive to private equity investors be- cause of: Relatively low levels of cash flow volatility within the indus- 1. try (certainly compared to the building products and auto parts industries); Each major packaging sector has growth opportunities 2. within it (pharmaceutical packaging, high-end consumer packaging, display packaging, e-commerce shipping sup- plies, etc.); and The industry offers a number of value-creating liquidity 3. alternatives. OUTLOOK FOR 2008 There was a drop off in packaging merger and acquisition ac- tivity in the second half of 2007. While there were 211 packaging transactions completed in the first half of the year, there were only 166 completed in the second half. A significant portion of the decline was driven by reduced activity by the private equity buyers. It will undoubtedly take private equity buyers (and the corresponding sellers) some time to adjust to more conservative credit conditions. That said, One Equity Partners completed the acquisition of Mexico-based Global Packaging Corp. in mid-December. Interestingly enough, the strategic buyers operated at the same high level in both halves of the year. The Rank Group's acquisi- tion of Alcoa's Packaging Division and Graphic Packaging's an- nounced merger with Altivity were two noteworthy second half strategic deals. There probably will be some fall off in merger and acquisition activity in 2008. However, with strategic acquirers still very active, and private equity groups sitting on record high levels of cash to invest, 2008 should remain a very active merger and acquisition year in the packaging industry. Public market valuation multiples decreased in 2007 in line with the rest of the equity markets. Questions regarding the over- all economy, in addition to continued high raw material prices, particularly the rising cost of resin on plastic manufacturers, have led to an across-the-board decrease in public market trading mul- tiples. Paper packaging companies have dropped from an aver- age of 9.2x in 2006 to 7.4x in 2007. Meanwhile, plastic packaging companies have decreased from an average of 8.8x in 2006 to 7.9x in 2007. INDUSTRY INDICATORS