Credit Crunch

As many industry participants have observed, the packaging industry has been reshaped over the past two years by numerous private equity-backed merger and acquisition transactions. What may not be as evident is that these private equity buyers have paid some of the highest multiples of earnings among acquirers of packaging companies. Some of the more notable private equity-backed transactions of the past two years are highlighted in Table I.

The prices paid in the transactions highlighted in this table are significantly higher than the median multiple of 7.0x EBITDA (earnings before interest, taxes, depreciation, and amortization) for all announced packaging merger and acquisition transactions in 2006 and 2007. In addition, private equity groups (and their portfolio companies) accounted for 49% of all North American packaging merger and acquisition transactions in 2006 and 2007.

This high level of private equity activity was primarily a result of two forces. One was the significant increase in equity funds raised by private equity groups. Over the past three years, private equity groups have been able to access tremendous pools of institutional capital held by pension funds, endowments, and insurance companies. These institutional pools of capital have grown dramatically as the result of robust capital market performances from 2003 through 2006, as well as by continued high levels of contribution into public and private pensions during the same time period. Figure 1 demonstrates the significant increase in private equity capital raised over the past several years.

The second force driving private equity activity was the increased use of leverage in structuring acquisitions. The same liquidity forces affecting the availability of private equity capital also were affecting the debt markets. Institutional lenders such as banks, insurance companies, hedge funds, and mezzanine funds were awash in capital. These lenders were looking aggressively to team up with private equity groups to finance large transactions. Figure 2 demonstrates the increased use of debt in structuring private equity acquisitions.

The net result was the strong growth seen in private equity activity and the commensurate increase in valuations. The packaging industry is particularly attractive to private equity firms because of the industry's relatively consistent earnings, modest public company valuations (see the going private transaction of Georgia-Pacific), and numerous exit options.

Of particular note was the breathtaking speed in which TPG was able to acquire both Altivity Packaging LLC and Field Container Corp. and subsequently merge with Graphic Packaging (pending as of publication date). This transaction demonstrates the numerous exit options available in the packaging industry and exemplifies why private equity sponsors have been attracted to packaging.

Post-Credit Crunch

The credit crunch that started last summer certainly has had an impact on the private equity industry. What began as a problem in the subprime mortgage industry quickly caused large institutional lenders to become more conservative. In fact, a number of investment banks were left holding financing commitments that they had to honor but were unable to syndicate as a result of this conservatism. This phenomenon was evident particularly in some of the larger private equity transactions.

The net result was a significant contraction in highly leveraged financings. Figure 3 demonstrates the rapid fall-off in high-yield debt activity since last summer's credit crunch.

Not surprisingly, the decrease in high-yield activity is having a meaningful impact in the volume of large private equity transactions. Private equity groups are not able to raise as much debt, and consequently the prices they are willing to pay for large transactions have come down. Sellers' valuation expectations have not yet adjusted to this phenomenon, so the volume of large private equity-backed transactions has dropped meaningfully. Figure 4 demonstrates the dropoff in announced leveraged buyouts in excess of $1 billion in size.

Impact on the Middle Market

Interestingly enough, the credit crunch has not affected middle-market transactions as dramatically. Mid-sized transactions simply were not large enough to access the more aggressive pools of capital available to the larger transactions. Figure 5 demonstrates very little change in leverage available for middle-market transactions since last summer. As a result of this relative immunity from the credit crunch, we continue to see a high level of private equity activity in middle-market packaging transactions.

Frankly, due to the tremendous amounts of private equity capital raised over the last few years, it would not be surprising to see an eventual pickup in large-transaction private equity activity in packaging. That money still has to find a home.

Bill Hornell is a managing director in the Investment Banking Group at Mesirow Financial. He has completed more than 60 merger and acquisition packaging transactions. A significant majority of these transactions involved consumer packaging businesses. Reach him at 312-595-6176; or by e-mail at bhornell@mesirowfinancial.com; www.mesirowfinancial.com.

Table I.
Acquirer Target Enterprise Value/Last 12 Months EBITDA Multiple Transaction Value ($bn)
The Blackstone Group Catalent Pharma Solutions (formerly a div. of Cardinal Health) 10.7× $3.3
Apollo Management Berry Plastics Inc. 9.4× $2.3
TPG Altivity Packaging (formerly Smurfit Stone's Consumer Packaging Div.) 8.0× $1.0

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