M&A Activity: The Temperature of 'Hot'
On November 6, my New Direction Partners colleague Jim Russell and I took part in a Printing Impressions/packagePRINTING Webinar titled "Hot Segments in Commercial and Package Printing—And the Multiples They Demand." As we said in the presentation, it would be hard to imagine a better environment for M&A transactions than the one we’re in now.
A favorable economy, record stock prices, low interest rates...at long last, all the right stars have aligned around M&A activity, and there’s no reason to think that the stepped-up pace of dealmaking will slow down anytime soon. We are seeing strong interest among private equity players, as well as strategic buyers. Private equity firms are attracted to growing entities that offer platform opportunities.
On the strategic side, printing and packaging firms that want to succeed as acquirers in this opportunity-rich environment will have three main objectives: to replace sales from mature markets; to drive efficiencies that mitigate or enable lower pricing; and to reposition themselves into growing (less mature) markets. Both types of buyers are seeking acquisition candidates that are in premium market segments and have characteristics that command higher EBITDA multiples—the primary indicator of value to the acquiring company.
We advise our clients that the premium areas of business for printing companies to be engaged in now are large-format output; retail POP; print for marketing programs as opposed to straight transactional printing; Web-to-print for e-commerce; customized direct marketing; digital printing; and data analytics. Packaging companies with flexible packaging, labels, pharmaceutical packaging, and folding cartons as their specialties are the pick of the crop in that category.
The higher-multiple players in these segments have quantitative and qualitative traits that smart acquirers will look for. Quantitatively, the candidate should be able to:
- demonstrate trends toward revenue growth and earnings growth
- produce EBITDA margins of 12 percent or more
- avoid account concentration above 20 percent
- possess critical mass within the acquirer’s segment
- present a healthy balance sheet
On the qualitative side, the prospective buyer will want to see:
- identifiable, defensible specialties
- growing customer loyalty
- a non-union workforce
- energetic and capable management
- a seller willing to stay on in an executive role
- no significant need for capital expenditure
The Webinar also touched upon industry demographics, and one of the points we made there was that as the number of plants continues to decline more steeply than the volume of shipments, the surviving plants would on average see increasing revenues. That’s certainly what the arithmetic suggests, but it won’t happen automatically for anyone.
Peter Schaefer, partner at New Direction Partners, is an experienced dealmaker with more than 25 years of investment banking and valuation experience, 20 of which has been focused exclusively on the printing and packaging industries. He has closed more than one hundred transactions in virtually every segment of the printing and packaging industries. In addition, he has performed hundreds of valuations for ESOPs, estate and gift tax planning and strategic planning purposes. Contact him at (610) 230-0635, ext. 701.