2023 Packaging Industry and Outlook to 2024: New Opportunities in Revitalization!

The M & A environment for packaging companies has strengthened in 2023 following fundraising and destocking affecting deals earlier this year. Going into 2024, experts believe the deal outlook will improve further. Will Frame, chief executive of Deloitte Corporate Finance, said: "Right now, our debt markets are stabilising, private equity funding is plentiful and the strategy is shifting to a growth model. So after a bumpy period this year, market buyers are really interested in deploying capital into sectors such as packaging."

While interest rates remain high, financing capacity has improved and "debt providers are starting to get more aggressive", says Mr. Frame. Several listed packaging companies have also announced deals of their own this year. Most notably, the upcoming acquisition of Viselok by Murphy Kappa could create the world's largest listed packaging company.

Michael Rocksland, senior paper and packaging analyst at Truist Securities, said the economic backdrop this year was "definitely a factor" as Smurphy Kappa had the opportunity to acquire "a company whose main business is at a cyclical low point".

Mr. Roxland said the deal would allow Smurphy Kappa to scale up immediately in the US at a time when the company is phasing out capital investments and cost-cutting programs, lessons learned from which can be applied to Veselok's assets. Companies in the space recently announced news of a rise in the price of containerboard in 2024, making the economic situation more favorable due to the potential for increased profitability. "If this all goes well, then the timing for Smurphy Kappa looks good as they reach a deal when prices are lower," he said.

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The combination of higher interest rates and a longer-than-expected destocking effect may also limit some M & A opportunities in early 2023, as growth companies are hard to find. Daspin, who advises on small deals, gives an example of how the high interest rate environment is squeezing some businesses.

"Customers of these packaging companies keep asking for credit. So I've seen an extension of the accounts payable process," he said, noting that in some cases, "packaging customers have turned down business because they can't fund their orders."

These factors could depress valuations. This year has also seen examples of packaging businesses filing for bankruptcy. Still, sources are not aware of any companies being sold for this particular reason. Instead, the reasons for the sale are long-standing, such as succession planning, liquidity needs or a desire to scale through Private Equity.

Sellers' motivations always depend on the circumstances, Mr. Daspin said. Sometimes "there are owners who don't actually need a liquidity event" and can keep shares that will help the next generation take over, or in some cases they need to cash out to retire. In other cases, he said, "there are owners who will never sell."

If private equity is involved, these investors tend to prefer to stay in the business because of the owner's Customer relationship. However, the situation may be different if the private equity deal is part of a broader platform or aggregation strategy.

Mr. Frame, who has a long history of advising on packaging M & A deals, said the sector's resilience was attractive to investors, with the paper packaging sector in particular attracting interest recently. As detailed in Deloitte's latest quarterly M & A trends report, areas such as labels and folding cartons have also received more attention. Separately, the sector's major public companies have been looking to streamline operations through possible divestitures.

"Activists and others are looking at trying to simplify the business," Mr. Rockland said. "I think companies themselves are looking at ways to monetize those businesses, especially if they have high leverage."

For example, Bohr Enterprises is about to sell its aerospace business, and Berry Global is considering selling its health, hygiene and professional division. Berry Global saw this area as a growth area when it bought Avintiv for $2.45 billion in 2015, but "the results didn't go as planned," Mr. Roxland said.

According to the Wall Street Journal, other examples include investor Carl Icahn's push for Crown to divest certain assets last year.https://www.risedongsheng.com/

Looking to the future

Heading into 2024, all eyes are on the Fed's impact on interest rates, but M & A activity in the packaging sector appears ripe to continue and could return to a more predictable pattern. "As we move away from the lingering effects of destocking, epidemics and supply chain disruptions, there is a normalising element that suggests something closer to a regular M & A environment," Mr. Frame said.

"My gut feeling is that M & A in Quarter 1 is going to be very busy", in part because some have been waiting for full-year 2023 earnings that could be better than or equal to previous years before making a decision, Mr. Daspin said, citing broader economic analysis. "I think we will continue to see some layoffs, and I do believe the economy will slow down a little bit, and I think sellers may be holding back mid-year," he said, citing broader economic analysis. Pointing to sectors such as food and healthcare packaging that could be more resilient.https://www.risedongsheng.com/

In terms of larger deals, Mr. Roxland said he did not expect there to be more room for consolidation between the industry's biggest paper companies, while Mr. Frame said there was more room for further deals at the small and medium scale.

He points out that the barriers to entry for capital-intensive substrates such as aluminium or glass are high, but this is not an important factor for paper and plastics processors. "It's a cycle of innovation, growth and consolidation," says Mr. Frame. "I think it's a permanent feature of packaging."