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Bigger Is Better
The malaise that has been plaguing the world economy in recent years has caused businesses across the globe to adjust their strategies in order to survive. With consumer spending showing no signs of making any major recovery, companies have been aggressively searching for ways to reduce their cost structure. Headcount reductions, cutting raw materials expenses, and moving production facilities to cheaper locations have all helped many businesses maintain or increase profits in recent years. Within the Packaging & Container industry many of the players, including AptarGroup (ATR) and Bemis (BMS) have taken to consolidation to help bolster their bottom lines.
Although some subsets of the P&C industry attempt to differentiate themselves through advanced features, the majority within the sector have to compete primarily on pricing. This more competitive pricing environment serves to encourage ever-larger company sizes. For the most part, many of the transactions tend to involve smaller companies being snatched up by larger players. Deals of this variety can help an industry giant expand into a new market, widen its portfolio of products, or simply increase the customer base. These types of acquisitions or mergers tend to be more popular amongst companies who produce more specialized product offerings, such as AptarGroup, as they seek to increase their manufacturing capabilities. The snatching up of smaller players is sometimes a more cost-effective way to enhance a company’s product lineup versus traditional research & development spending.
For most, however, mergers and acquisitions are most effective when used to pick up market share. A recent example of this approach is Bemis Company’s purchase of Rio Tinto’s Alcan Americas packaging business. The new business helped to increase Bemis’ exposure to the fast-growing Latin American markets. By taking this route, companies are able to quickly gain a presence in the world’s emerging economies while being spared the expenses of establishing new production facilities.
For some, the concept of consolidation doesn’t just apply to snatching up other companies. For many, the benefits of consolidation come from unloading some less profitable units. Owens-Illinois (OI) sold off its plastics container business in August, 2007 for $1.9 billion. Beyond the benefits from the additional capital the deal brought, the company was able to focus its full attention on its core glass bottling operations. With the upturn in alcohol consumption, especially in bottled form, in the world’s developing economies, this move has prove particularly lucrative to Owens' bottom line during the past few years.
Going forward, with consumer spending unlikely to make a major recovery any time in the near term, the pressure to reduce costs will likely remain high. However, now that the flow of capital has increased somewhat when compared to the nadir of the financial crisis, the prevalence of moves will likely increase somewhat. When looking throughout the P&C industry, there are a few candidates who seem likely to pursue some type of acquisition or sell off. AptarGroup seems likely to continue its recent inroads into the healthcare segment. With roughly $350 million of cash and little long-term debt on the balance sheet, it should be relatively easy for ATR to add some small- to mid-sized companies. Second, MeadWestvaco (MWV) is likely to focus on enhancing its beverage and healthcare businesses through some merger or acquisition, particularly in the Asian region.
When looking for potential acquisition targets, in Value Line’s Small & Mid-Cap Investment Survey one of the more intriguing options is Northern Technologies International Corporation (NTIC). The company, which specializes in the making of environmentally friendly packaging, would seem to fit in well with Sealed Air (SEE) as it tries to diversify away from the protective packaging business. The lower market capitalization and healthy growth prospects of Northern Technologies should make it appealing to potential suitors. For companies with a bigger acquisition budget, Graham Packaging (GRM) may be intriguing. The maker of specialized plastic food and beverage packaging is one of the leading suppliers of dispensing products to the household products sector.
Over the next few years, the increasingly commoditized selling environment of the Packaging & Container Industry will only serve to increase the level of consolidation. The companies that have the cash on the balance sheet and/or the ability to raise capital through a stock issuance or a debt release will be in the best position to make meaningful acquisitions over the next few years. In particular, AptarGroup, Owens-Illinois, and MeadWestvaco are issues that should appeal to investors trying to take advantage of the trend toward consolidation.