M&A activity in the packaging space remains heightened and is only expected to accelerate in the coming years. Statistics indicate that, on average, over 36 million packages are delivered in the United States each day. The domestic packaging industry is expected to grow at a Compound Annual Growth Rate (CAGR) of 3.6% through 2026.
Strategic and sponsor investors have been encouraged by:
the rise of ecommerce;
a surge in consumer spending power;
attractive margins; and
a high degree of fragmentation, resulting in numerous opportunities for consolidation and growth.
This article will briefly examine the packaging industry and why it is primed to become a target of tremendous private investment activity over the coming years.
Manufacturing
When evaluating any packaging company, the fundamental question that needs to be addressed is how much control the company has over its supply chain. Therefore, any serious discussion of the packaging industry must begin with an overview of how packages themselves are produced.
Once raw materials have been sourced from either a timber farm or a recycling facility, there are several sizeable operations that comprise the manufacturing process. Each operation in the manufacturing process is capital-intensive and requires specific expertise. Control over these operations is what distinguishes smaller, independent manufacturers from larger, vertically integrated companies. Independent companies (usually, but not always) operate in just one of the several operations that comprise the manufacturing process. Integrated companies, by contrast, often control every operation process, from the sourcing of raw materials to the production of finished packages, as well as every aspect of operations in between.
Supply Chain Issues
Businesses everywhere are feeling the effects of the supply chain crisis, and packaging manufacturers are unfortunately not an exception. The lingering effects of COVID, the staggered return to normalization and the unprecedented demand have all contributed to lead time delays and price increases.
The biggest challenge, especially for independent manufacturers, has been locking in their supply. “We are fortunate enough to have longstanding relationships with our suppliers so it has not been a problem for us,” said Don Droppo Jr., CEO of Curtis Packaging. However, “there are some sheet plants that have been fired as customers because their suppliers are stretched so thin,” he added further. In the year 2021 alone, the price of paper rose approximately six-fold, and once rare and difficult conversations with accounting have become all too common. “Companies are sick of every component of every process increasing,” said Droppo, adding that “they have practically stopped caring about cost; they just need it by Friday.”
As a result, companies that once sourced production materials using just-in-time delivery have transitioned to a “just-in-case” inventory strategy to minimize the probability of running out of critical inputs. This overbuying and hoarding has exacerbated the already surging price of paper board and other important production materials in the packaging industry.
Buyer’s Perspective
The pandemic has changed consumer behavior, and goods are being packaged and delivered at an incredible rate and scale. Investing in a packaging company is an investment into the infrastructure that fuels the modern consumer economy.
Many investors enter the packaging space with a vision to grow consolidation. This is typically done through vertical or horizontal integration. Vertical integration requires a significant amount of capital and can be logistically difficult for a buyer who is new to the space. When done properly, however, it can alleviate many of the pain points of running a small, independent manufacturer by consolidating different supply chain components. On the other hand, horizontal integration is slightly less complicated and a tested way for independent packaging manufacturers to achieve economies of scale. Further, horizontal integration gives investors the ability to cut down on costs, increase purchasing power, and potentially expand into new markets. Given the current supply chain issues, it is increasingly common for an investor to purchase a large or mid-sized packaging company and then expand it through acquisition of a smaller company.
Seller’s Perspective
From a seller’s perspective, your business outlook is generally bright for the reasons detailed above. You may already be fielding offers from a number of investors, which begs the question: why sell now? The truth is, there is no simple answer as to whether or not you should sell your business. You have put years of hard work into your business, and the decision to sell may be one that comes down to more than just pure economics.
With that being said, the macro conditions surrounding your business may be favorable, and there may be a number of private investors who are willing to pay a premium that would have been unthinkable several years ago. Regardless of whether you are looking to make a complete sale or grow your business via capital raised through a partial sale, the intricacies of a deal may depend on a host of factors. For further guidance and information, please reach out to Scott Daspin (Director of Investment Banking – Triad Securities) at (212) 349-1004 or via email at sdaspin@triadsecurities.com, or to Paul Marino (Partner – Sadis & Goldberg LLP) at (212) 573-8158 or via email at pmarino@sadis.com.
