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Looking to Expand By Acquisition? Here’s How to Be a Better Buyer

By: James Callari 1. June 2015

 

In part one of this-three part blog series, we featured a Q&A with Deborah Douglas in which she offered tips on what plastics processors need to know to get more savvy on evaluating the worth of the their company. Her insights are both useful and timely in light of the spate of M&A activity in plastics processing of late.

 

Ms. Douglas is an expert on such matters.  She is the managing principal of Douglas Group, a St. Louis-based M&A firm that specializes in selling plastics processing companies. Ms. Douglas is a published author of two books, her most recentRipe: Harvesting the Value of Your Business. She is frequently asked to speak at varied industry and trade events and often serves as luncheon speaker for general business forums. She has been published in numerous trade and business periodicals including Plastics News, ISHN, The Wall Street Journal, Fortune Magazine, and Profit Magazine to name a few.

 

In part two, she provides tips on how owners of processing businesses can get better at selling. Here, in the final installment, Ms. Douglas discusses how processors can better prepare themselves for an acquisition.

Plastics Technology: What recommendations would you make to a plastics processors looking to acquire another processing operation?

 

Ms. Douglas: Success in acquisitions begins with doing the right acquisition.  Too often buyers don’t focus on what they really need to buy, to do a great transaction.  The great purchase isn’t determined at the date of closing.  The great purchase is the one you look back on five years from now, and say, “Boy, am I glad we did that!”

 

So the start of the process should be careful attention to what is the perfect seller to fit.  What are we missing that the perfect seller might provide us?  What talents or expertise or capabilities do we have that could be worth way more, if we acquired someone to give us new or special access to a market?  This beginning step to the acquisition process is actually probably the most important of all to eventual success.

 

As you begin to approach the potential sellers you identify, begin with courtesy, and carefully guarded confidentiality in the process.  There is no faster way to kill a possible deal than sloppiness about confidentiality.  You may damage the seller company, and you’ll almost certainly damage your chances for successful acquisition!

 

Plastics Technology: So relationship building is important?

 

Ms. Douglas: Be cognizant of the seller’s background and situation, and work to establish a warm relationship from the start.  We sold a company last year to an equity fund buyer who offered $32 million for the company.  At the same time, we had another offer for $35 million from a strategic buyer.   The strategic guys were from a large company and enjoyed telling our seller, “Your operation is interesting, but this is how we big guys do it.”  For our seller client it was worth losing $3 million of selling price on the deal to not sell to them.   He felt the equity guys would be better for his people, and better for his company long after he was gone.

 

We worked on a buy-side transaction for a plastics company based in Florida, who wanted a Midwestern operation with certain capabilities.  We found the perfect fit in outstate Arkansas.  The would-be seller was a Southern Baptist, who had told us as we talked that finding a “moral” buyer was important to him.  Furthermore, he told us he did not believe in drinking, or even in card playing, as he felt those were outside of “good moral” behavior.  Thus, we knew we were dealing with a very conservative guy, and we told our buyer client all we had learned. 

 

The buyer’s son met us at the Arkansas plant to try to cement the deal.  The son arrived wearing an “Elton John Aids Benefit” t-shirt, and came with a large mesh bag of beer-logo’d cups in tow as a gift.  As I sat inside the plant with the seller owner and watched the young man approach, I knew the deal was dead before he ever got to the door.  It’s worth the effort to try to establish the relationship with the seller.  You must have his goodwill to have a chance at success.

 

Plastics Technology: How important is speed and decisiveness is closing the deal?

 

Ms. Douglas: If you’re moving in the process toward a possible purchase, I would always encourage buyers to move quickly and decisively.  If you know your intended pricing, and you know you want to move, try to get a letter of intent in place as quickly as possible, with exclusivity if you can. If the seller is unwilling to commit firmly, do what you can to move forward quickly, even without a letter of intent.  The buyer who can close in 30 days instead of 90 makes a powerful impression on the seller, and may secure the deal for that alone.

 

Also, as a buyer, keep in mind that price alone should not be the sole decision point.  The right fit is far more critical to long term success than price.  That of course does not mean that money is no object.  If pushed too far, you may simply have to withdraw.  But I would tell you paying 20% more for the company that’s the ideal fit should not stop you. In the end, the fit will make the far greater difference to your satisfaction with the deal.

 

When you think you have agreed on pricing for the deal, and start to move forward in due diligence, this is a time when you will have near maximum contact with the owner seller.  It is a unique opportunity to establish relationships that will serve you especially well post sale.  Be respectful of confidentiality worries.  Be thorough in your due diligence, but do so without disrupting the seller operations.  That 30-90 day period while all of this goes on makes it far more likely (or less) that you’ll come to successful close, and can jump-start your new business together tremendously, if done right.

PE Film Market Analysis: T-Shirt Bags

By: James Callari 27. May 2015

Last year, processors consumed about approximately 1.35 billion lb of polyethylene to produce grocery sacks, also known as t-shirt bags. Though ban, taxes and other environmental roadblocks are seemingly never-ending threat, the market should experience modest growth of 1.6% a year through 2017, when PE consumption for T-shirt bags will reach 1.420 billion lb.These are among the conclusions of the most recent study of the PE Film market conducted by Mastio & Co., St. Joseph, Mo.

 

Plastic bags still face competition from paper bags, as some consumers believe paper makes for a more natural and environmentally safe bag, says Mastio. Truth be told, paper manufacturing pollutes the water, releases dioxininto the atmosphere, contributes to acid rain, and depletes the tree population, the study points out.

 

Moreover, Mastio states, PE t-shirt bags consume 40% less energy than paper when produced, and generate 80% less solid waste than paper bags. Fewer atmospheric emissions are produced and less waterborne wastes are released with PE t-shirt bag production compared to paper bag production.

 

Currently, reusable cloth sacks continue to make inroads into this market due to the pressure from several state and city governments. Many states and cities are in the process or have already enacted legislation on single-use, paper and plastic bags that varies from an all-out ban to imposing a tax or bag fee on each bag at the point of sale. As a result, many stores are now selling their own reusable cloth or plastic sacks to consumers, Mastio point outs.

 

MATERIALS TRENDS

 

T-shirt bags are made primarily of HMW-HDPE and MMW-HDPE. HMW-HDPE is the resin of choice due to its superior strength in thinner gauges than LLDPE or LDPE. HDPE resins, particularly

 

UHMW-HDPE and HMW-HDPE grades, maintain the desired strength levels when downgauged, and have very high impact resistance.

 

LLDPE and LDPE resins are utilized when there is a desire for a strong bag that has improved printing properties, a softer texture, and more surface gloss. The various grades of LLDPE resin utilized included the following: LLDPE-butene, LLDPE-hexene and LLDPE-octene. LDPE-homopolymer resin was also incorporated in the production of t-shirt bags. The cost and appearance are typically higher for LLDPE bags when compared to HDPE bags, and some bag strength is sacrificed. With the small operating margins that most grocery stores experience, HDPE bags are a more feasible economic choice.

 

TECHNOLOGY TRENDS

 

T-shirt bags are made via the blown film process. Some 20 or so years ago, most t-shirt bags were single layer. Last year, according to the Mastio report, nearly 72% of t-shirt sacks produced were coextrusions, generally three layer. On average, says Mastio, PE t-shirt bags used 30% less material today than bags made five years ago. Advances in the PE resins used to produce t-shirt bags have reduced material requirements without decreasing bag strength.

 

MY TWO CENTS

Equipment builders argue that too many processors are making do with older equipment when newer technology will permit them to produce better quality films at higher speeds. One industry source estimates that more than 70% of the 20 billion lb/yr of blown film is currently processed on equipment that’s 10 years old or older. But T-shirt bagmaking is a highly competitive market will razor-thin margins, making big capital equipment investments a big challenging.

 

That argument aside, if more processors followed the lead of Novolex (Hilex Poly), staving off environmental threats might be a bit less challenging. The firm made a huge commitment in setting up an infrastructure allowing to collect post-consumer film and reprocess it into new bags. Read that story here.

Got the Right Value for Your Company? Here Are Tips on How to Sell It

By: James Callari 27. May 2015

 

In part one of this-three part blog series, we featured a Q&A with Deborah Douglas in which she offered tips on what plastics processors need to know to get more savvy on evaluating the worth of the their company. Her insights are both useful and timely in light of the spate of M&A activity in plastics processing of late.

 

Ms. Douglas is an expert on such matters.  Sheis the managing principal of Douglas Group, a St. Louis-based M&A firm that specializes in selling plastics processing companies. Ms. Douglas is a published author of two books, her most recentRipe: Harvesting the Value of Your Business. She is frequently asked to speak at varied industry and trade events and often serves as luncheon speaker for general business forums. She has been published in numerous trade and business periodicals including Plastics News, ISHN, The Wall Street Journal, Fortune Magazine, and Profit Magazine to name a few.

 

In part two, she provides tips on how owners of processing businesses can get better at selling.

 

Plastics Technology: As companies prepare to move forward in the selling process, what are the “keys” to ensure they do well in the end?

 

Ms. Douglas: First and foremost, it is critical for owners to keep the process highly confidential. We have never had an owner sorry about keeping the sale confidential.  Unfortunately, we have had owners who insisted upon open discussion, who were sorry in the end.  If your employees know that you are considering sale, they may become afraid.  That doesn’t mean that all will race out to look for alternative jobs, but your best people encounter those opportunities without really trying.  If they’re insecure at the moment, they may just think, “Maybe I should at least look.  You never know…” Also, customers too may become insecure to know you are thinking of sale.  They may think, “At least I should try to make sure I have alternative vendors I could turn to.  Just in case…”

 

The most successful owners who sell for the true home run pricing usually find the “best” buyers in unusual places.  Many of the seller owners we talk with tell us at the outset, “I probably know who’s going to buy me.  It will be one of these three or four companies.”  Usually they’re thinking about competitors who they know. 

 

Plastics Technology: And is this how it usually turns out?

 

Ms. Douglas: After 24 years in this business, I have learned that those top three or four are almost always wrong.  The best buyer is not the obvious.  It’s the company that’s not in your business, but does something slightly adjacent.  They get more when they buy you.  They can, for the first time, now do something they could not do before They’ll pay a premium for that head start.  If you want to have a chance for the true homerun sale—the grand slam of a lifetime—hire help who will look exhaustively to identify the perfect buyer.

 

Plastics Technology: Let’s talk a bit about pricing. How do you work that into the conversation?

 

Ms. Douglas: In early conversations with buyers, they will always ask how much you want for your company.  Professionals never set price.  We make the buyer set the price.  The open market will decide who wins.  It is easy for us to maintain that policy, but it is hard for the do-it-yourself owner to do.  Buyers tend to make you feel disingenuous for not responding to that question.  “How can you expect me to move forward if you won’t tell me your price?”  Buyers big enough and smart enough to have the money to make acquisitions know how to set price.  (We would never get the huge prices for transactions that we sometimes do get, if we set the price ahead of time.)

 

In presenting information about your company, it is important to be thorough and honest.  Even if there’s bad news sometimes, or a weakness that you must acknowledge, buyers generally take it quite well if you’re up front about it.  In fact, in many cases if you find the perfect buyer, they will think of it as an opportunity!  (“If this company is making this much now, just think how it will do when I fix the problems!”)  Great deals are consistently made from a foundation of honesty and thorough information.  In this case, honesty pays.

 

Buyers looking at your company may be amazingly fast to offer you a “letter of intent.”  Novice sellers get excited about such offers, and are often far too quick to accept.   A letter of intent gives the seller nothing.  It says the buyer has an interest in buying, it says a price (or sometimes a price range), and it says the seller, by signing, agrees that the buyer can now do due diligence to actually decide if he wants the deal.  In the meantime, the seller, by acceptance, normally agrees to deal exclusively with just the one buyer, and not talk to others.  If you’re thinking of accepting such a letter, consider the following:

 

If the buyer needs a “stop shop” (an exclusive dealing clause) to continue, consider requiring a nonrefundable deposit first.  If you chase away other alternative buyers, they usually will not come back later.  It’s a big deal to pull yourself from the market.

 

Plastics Technology: What kind of information should be included in a letter-of-intent?

 

Ms. Douglas: If you are contemplating a letter of intent, first make sure you have all of the critical transaction details worked out in advance.  If you have to stay with the company—for how long, and what will your compensation be?  Will there be a cap on the indemnifications the buyer will ask for in the purchase agreement?  What happens to profits or changes in balance sheet between the letter of intent date and closing?  Will the physical property be purchased or leased as part of the deal, and if so at what price?  If there’s any noncash piece to the deal, what is the collateral or guarantee that it will really be paid?  The more thorough the seller can be in working out details before exclusivity, the stronger the deal.

 

Plastics Technology: Any other considerations?

 

Ms. Douglas: If you enter into a letter of intent, be sure to define timeframes tightly for the period until closing.  Normally 60 days should be adequate. You may want to put in interim dates for completion of certain elements of their due diligence.  Silly long timeframes to close increase risk of failure and are extremely costly to the seller, who must provide time and attention constantly to buyers as due diligence progresses.

 

Make sure to insert a provision to say that if the transaction price or terms change materially, the exclusivity for the buyer is void.  Such a provision encourages buyers to think long and hard before proposing changes, and can make the difference in preserving the deal or not.

 

Selling is a complex process, and sellers generally need good professional help to get it done.  Look for a representative who does only the sale of companies.  Our normal time to get a sale done is something over 2000 hours (and we’re efficient and know what we’re doing).  It’s time-consuming, and it’s important.  Your attorney knows how, for the legal mechanics, but he does not know the competitive marketplace, and he does not have that kind of time to spend focused on your deal.  Your accountant is not terribly motivated; he’ll probably lose a client when the deal is done.  And he can’t represent you on a success fee basis, because then he wouldn’t be independent.  There are good intermediaries out there, who serve clients reliably and competently.  It is worth the time and effort to find them.

 

Business owners do great things for our country.  They create jobs, and opportunities for people.  They improve goods and services for everyone.  They fill the public coffers with tax dollars.  They deserve success in the end.  Sale of the company is often the culmination of a lifetime of hard work.  It’s worth the time and attention to do well.

What’s Your Company Worth?

By: James Callari 19. May 2015

As I wrote in a previous blog, this is a good time to be in the business of melting plastics. More and more existing processing concerns are expanding by adding to their manufacturing footprint and buy new machinery. Processors from Europe and even China are setting up plants in the U.S. to tap into a growing and very optimistic American market.

 

And, to no one's surprise, this bump in business has also resulted in an uptick in mergers and acquisition activity. Obviously, making an acquisition is another way to expand a business. What’s more, when business conditions are good that also presents an opportunity for firms seeking an exit strategy to get maximum value for their operation.

 

So, what’s your business worth? To help you find out, Plastics Technology reached out to one of the experts in the field. Deborah Douglas is the managing principal of Douglas Group, a St. Louis-based M&A firm that specializes in selling plastics processing companies. Ms. Douglas is a published author of two books, her most recent: Ripe: Harvesting the Value of Your Business. She is frequently asked to speak at varied industry and trade events and often serves as luncheon speaker for general business forums. She has been published in numerous trade and business periodicals including Plastics News, ISHN, The Wall Street Journal, Fortune Magazine, and Profit Magazine to name a few.

 

In this Q&A blog, Ms. Douglas discusses some of the issues processors need to consider to properly evaluate the worth of the business should they be pondering selling it. In two blogs to follow, she’ll offer her tips on how you can be better at selling and buying a plastics processing business.

 

 

Plastics Technology: So please fill plastics processors in on what’s happening on the M&A front?

 

Ms. Douglas: There is so much acquisition activity right now that navigating it is really a difficult and hot topic for owners. We are receiving a lot of requests from owners about how to value their companies, and questions on how to proceed in considering sale.

 

Owners of plastics processing companies have intense interest in the merger and acquisition activity they see, but the primary hook to that interest is a desire to know how much the company they own may be worth in the M&A markets of today.

 

Plastics Technology: So how do they get started?

 

Ms. Douglas: The simplistic and most obvious answer to that question involves some sort of multiple of the pretax earnings of the company in question.  However, real-life market conditions actually go far beyond that to come to value.

 

Owners seeking such value probably always need to “start” with a calculation of EBITDA, which approximates cash flow of the enterprise.  EBITDA is earnings before interest, taxes, depreciation or amortization.  To develop such tally owners also need to make that “owner- neutral” —by adding back or subtracting out any odd-ball impacts on the numbers caused by non-arm’s-length transactions. 

 

Plastics Technology: Owner neutral? Could you provide a specific example?

 

Ms. Douglas: For example, If the owner takes out salary $ 1 million a year for himself, but his arms-length value (i.e., a sensible fair market value for a replacement person) might be, say $250,000, that means there’s a $750,000 add-back to the numbers to really come up with a fair EBITDA level of performance (restating EBITDA to be “ as if” expense were really only $250k per year). 

 

If, on the other hand, the owner doesn’t take any salary as expense, even though he really does put in hours and work extensively for the company, that company should have a “deduct” to come back to approximate arm’s length EBITDA.

 

Plastics Technology: What needs to be considered after EBITDA?

 

Ms. Douglas: After coming to a reasonable fair value of EBITDA for the company, owners then need to estimate what sort of “multiple” of EBITDA their company would likely bring in a competitive buyer market.  The average plastic processor could generally estimate that they might get someplace between a 5 multiple and perhaps a 6.5 multiple for sale.  That multiple could sink below 5 for a very small enterprise, or for an entity with significant owner dependency, or other problem issues.  On the other hand, that multiple could rise above those guidelines, maybe to 7 to 10 for example, for patented proprietary products or technologies, or for ownership of binding long term contracts with customers.

 

Plastics Technology: What are the kinds of things that tend to drive up value?

 

Ms. Douglas: The things that tend to push pricing up include:

  • Exceptionally high profit levels (15% plus for plastics processors)
  • Strong and growing customer base with promising future prognosis
  • Outstanding second tier management
  • State of the art equipment and facilities
  • Well-defined focus, with exceptional expertise in some defined area
  • Long term contracts with customers
  • Double-digit growth rates
  • Strong and stable balance sheets

 

Plastics Technology: On the flip side, what are the conditions that tend to drive value down?

 

Ms. Douglas: Things that tend to suck pricing downward include:

  • Dependency on one or a few big customers
  • Declining margin trends
  • Lack of capable second-tier management
  • Litigation history
  • Lack of growth in recent history
  • Below average profitability (EBITDA under say 5-7% for processors)
  • Serious capital-equipment needs in the near future

 

Plastics Technology: Of course if there is more than one prospective buyer that certainly strengthens the seller's position. Is that fair to say?

 

Ms. Douglas: Regardless of company-specific situations, pricing is always, inevitably, much stronger if the would-be seller is able to find and court multiple competitive buyers. Good competition for any given seller can throw all “norms” for pricing out the window, to the great benefit and happy day for the selling owners.

 

Our firm sold a company several years ago, which we thought would produce a value of around $30-35 million.  As we progressed on the deal, we found that there was one group of particular buyers, who desperately wanted access to our client’s customers.  Before we came upon the goldmine of truly great buyers, we had 15 offers for our client.  Offers ranged from about $25 million to high $30s.  When we found the perfect buyers, we suddenly, in one week, had three offers over $50 million.  We closed that deal about 60 days later, at an all-cash price of $67 million.  Our client was ecstatic, and we were well-paid and very happy.

 

Competition can make a huge difference.  There’s a quote I like that paints the picture.  Al Capone said, “You can get a lot more with a kind word and a gun, than with a kind word alone!”  A good competitive selling process is the seller’s gun!

PE Film Market Analysis: Shrink Film

By: James Callari 18. May 2015

 

Last year, processors consumed approximately 805.6 million lb of PEs of various varieties to produce shrink film. With an average annual growth rate (AAGR) of 2.2%, PE resin consumption for the production of shrink film is expected to reach 860 million lb by 2017. The biggest application for shrink film is for unitization of consumer products, with new applications for constantly being developed. The public’s growing appetite for the convenience and cost savings of purchasing products in bulk has spurred the increase in demand, as has—relatedly—the continued popularity of superstores, warehouse stores, and wholesale clubs.

 

The physical characteristics required of shrink film include strength, puncture resistance, sealability, clarity, and excellent load retention. Some shrink film applications require coloring, ultraviolet light inhibitors (UVI), corrosion inhibitors, venting, varying coefficient of friction (COF) levels, anti-static additives, moisture barriers, printability, hot-tack strength, and controllable shrink or draw down percentages.

 

 

These are among the conclusions of the most recent study of the PE Film market conducted by Mastio & Co., St. Joseph, Mo.

 

 

The study notes that shrink films are classified by the amount of contraction or shrink percentage when heated in both the machine direction (MD) and the transverse direction (TD). The percent of contraction in the machine direction (MD) typically ranges from 50% to 70%, with 60% being the most common.

 

Contraction in the transverse direction (TD) typically ranges from 5.0% to 15%. Shrink films utilized for wrapping paperback books, magazines, and skin or blister packaged products with a cardboard backing require a soft shrink or low percent shrink film. Low force shrink films eliminate buckling or distortion of products and related packaging, according to the Mastio report.

 

MATERIALS TRENDS

 

The Mastio study reveals that LDPE resin remains the principal material of choice for the production of shrink film due to the resin’s high clarity and ease of processing. LDPE-homopolymer and LDPE-EVA copolymer resin grades are extruded separately, blended, or coextruded with other polyolefins for shrink film production. LDPE-EVA copolymer resins are often used to increase the shrink film’s clarity, low temperature flexibility, impact resistance and heat-seal properties. LDPE-EVA copolymer resin is well suited for shrink film and bags that require printing or freezing. LDPE-EVA copolymer resin also provides excellent adhesion when used as a bond layer in coextrusion or lamination with other heat-sensitive substrates such as BOPP film, because the film surface softens as the EVA copolymer content increases. Additionally, a small amount of LDPE-acrylic acid copolymer (LDPE-EAA) was also reported.

 

 

Mastio notes that other resins utilized in the production of shrink film include blends or coextrusions of LLDPE resins including butene, hexene, super hexene, octene (LLDPE-butene, LLDPE-hexene, LLDPE-super hexene, LLDPE-octene), and mLLDPE grades. LLDPE resins, alone, lack the physical characteristics necessary to produce shrink film.

 

More processors continue to use metallocene grades of LLDPE in the production of shrink film, according to the study. The metallocene process produces resins with very predictable performance characteristics that are extremely uniform and consistent. Improved film clarity and impact resistance, in lower gauges are some of the value-added benefits of using mLLDPE resin.

 

TECHNOLOGY TRENDS

 

Blown film is the preferred process of producing shrink film, because it allows the manufacturers to custom design film with the required percent of contraction. Control of contraction and orientation in both the MD and the TD is possible in blown film extrusion.

 

The cast film process, on the other hand, allows greater control of shrink film gauge uniformity, increased clarity, and higher output rates. Another benefit of cast film extrusion is the ability to produce shrink films with less shrink force in the TD, since most of the potential shrink force is limited to the MD. Shrink films produced with the cast film extrusion process are often called “low force” shrink films and are used for applications such as magazine overwrap. Over contraction of shrink films in those types of applications can cause the magazines to wrap or buckle when the outer packaging is heat shrunk.

 

Last year, coextruded structures accounted for about 61% of the market, states Mastio. Three-layer coex structures are most common, though some processors go up to seven.

 

MY TWO CENTS

 

Last year, Mastio reports, the industry’s top six shrink film processors held a collective market share of 60%. These are among the industry largest, most recognizable and most technologically advanced names in the film extrusion market, such as Berry Plastics, Sigma Plastics Group, Bemis North America, AEP Industries, Inc., Sealed Air Corp. (Cryovac Div.), and Cove Point Performance Packaging (Clysar, L.L.C. Div.). Most industry players categorized the market as “strong and stable,” with future growth depending on the overall economy (GDP).

 

Some of the smaller players are introducing new products for bulk packaging to reduce overall packaging usage. Others smaller players are looking at new markets and unique resin blends and combination in an effort to differentiate their product offerings. Market niches seem to suggest an opportunity for smaller processors to compete.




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