Merger and acquisition activity in the paper packaging industry continues in 2014 and based on empirical information obtained by those operating in this industry sector, it is expected to continue into 2015 as strategic buyers look for value through consolidation. This is true as well in the food packaging industry sector for a variety of reasons. Deloitte Corporate Finance LLC reports that increased consumer spending will help drive healthy growth in the packaging industry. Companies that survived the recession stand to continue to benefit with improved margins driven by a strong competitive environment and falling material prices.
It is this competitive environment that has led some small and mid-market companies in the traditional paper packaging industry to be willing sellers and seek strong buyers while their values remain steady but they recognize an uncertain future. This uncertainty is due to increased competition from paper packagers that have already experienced the benefits of consolidation by combining with other packaging companies with the capital and resources to more effectively compete with the smaller and mid-market packagers. Further, the smaller and mid-market packagers do not have the capital or other resources required to open plants in other areas and to serve food manufacturers that demand multiple source suppliers. They recognize they will have to raise capital, increase debt or consolidate with a larger company that can serve as a platform for future growth.
The small to mid-market food packaging companies seeking a buyer generally find that most buyers are strategic. Even private equity fund buyers are purchasing these companies to add to their existing portfolio. Buyers are interested because many of the companies that survived the recession are operating profitably and represent good values. In many cases, the acquisitions are immediately accretive to the buyer.
As in most industries, investment bankers are used in the sale of small to mid-market food packaging companies. Selection of an investment banker with industry experience and contacts is an important decision and sets the tone for the entire transaction.
The role of the investment banker is often to conduct an auction to find the “right” buyer. The banker can use its experience and contacts in the food packaging industry in distributing material about the target on a confidential basis to a number of pre-selected potential purchasers. Without confidentiality, competitors could contact the target’s customers to call into question the ability of the target to fulfill their needs for packaging product in the future in an attempt to lure those customers away. Potential purchasers who demonstrate the right degree of interest and the financial ability to purchase the business are then asked to sign confidentiality agreements that allow them to participate in management presentations which they then follow up with signed letters of intent.
Depending on the strength and attractiveness of the target, it may be able to structure the transaction so that it is most advantageous for its shareholders or equity holders from a tax and liability standpoint. In the sale of business context, including an auction, the sale is often structured as a straight purchase or a merger. When the shareholder or equity holder base is small and there is no question that all of the owners are in favor of a sale, a straight purchase in which all of the shareholder or equity holders sign the sale and purchase agreement is preferred. The reason is that closing can proceed quickly once the negotiations with the acquirer are completed. When the shareholder or equity holder base is larger and there is no assurance that all shareholders or equity holders are in favor of the sale, a merger involving the target and the acquirer is almost mandatory. In the merger context, state corporate law and the companies’ organizational documents dictate the shares needed to approve the merger.