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May 28, 2023

Taking the Pulse of Plastics Industry M&A Activity

Michael Benson and David Evatz | May 03, 2023 While the plastics market is

Michael Benson and David Evatz | May 03, 2023

While the plastics market is facing uncertainty fueled by inflation, interest rate hikes, and geopolitical issues that concern businesses and investors alike, there is still significant demand for high-quality companies from both strategic and financial buyers, but not all companies will be equally affected by the challenging environment.

There has been a slowdown in M&A activity recently, given the uncertainty in the markets, but for business owners looking to exit, the relevant information is their business’ performance as well as the health and outlook of the end markets that the company serves.

In addition, the ability for buyers to raise capital for acquisitions is more difficult and more expensive in the current environment, which is a further drag on the overall M&A market. Specifically, the cost of capital for acquisition financing is meaningfully higher than it was a year ago, which can have an impact on a buyer's ability to meet a seller's value expectations.

Despite all the uncertainty, however, strategic, hybrid, and financial buyers remain active in M&A. Financial buyers, holding near record levels of dry powder, continue to pursue new and add-on investment opportunities.

The global economy has experienced a broad and sharper-than-expected slowdown, as geopolitical and macroeconomic headwinds continue to swirl. Companies are closely monitoring the economic climate and taking measures to mitigate the potential impact of a recession. End market stability and company-specific value drivers continue to provide insulation from broader economic trends.

In addition to this, raw material prices, particularly for certain types of resin, have recently dropped because of improved supply chain dynamics and an oversupply of some resin types.

Last year, the Federal Reserve took aggressive action to cool demand and tame inflation, which had surged to a 40-year high. The Fed raised rates seven times in 2022, each being an attempt to curb historically high inflation. Recent comments signal more rate hikes are coming in 2023; however, there could be a moderation in the pace of future rate increases.

Labor costs and availability, along with material price volatility, have normalized from 2021 highs, although these are still challenging for many plastics companies. The market continues to see strong demand in certain areas and softness in others, and that is very much specific to the company and its end markets. Many companies are employing more aggressive pricing strategies to combat higher costs.

US manufacturers benefited from reshoring efforts that started before the COVID-19 pandemic. Since then, reshoring has accelerated, driven in particular by the crisis in Eastern Europe and an overall desire among many OEMs to have a more stable supply base in the United States.

About the authors

Michael D. Benson is a managing director in Stout's Investment Banking Group. He is responsible for the execution of investment banking transactions, which include mergers, acquisitions, divestitures, and the private placement of senior debt, subordinated debt, and equity securities.

David M. Evatz leads the Plastics & Packaging Industry Practice within Stout's Investment Banking Group. He has extensive mergers and acquisitions experience, having executed numerous M&A and corporate finance transactions, including buy and sell side assignments, leveraged buyouts, joint ventures, fairness opinions, and the private placement of senior debt, mezzanine debt, and equity securities.

Stout provides a full range of strategic alternatives including merger and acquisition (M&A) advice, private capital raising, financial sponsor coverage, and other financial advisory services to family-owned businesses, portfolio companies of private equity firms, and divisions of large corporations.

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