M&A Report

By Steve Katz, Editor | July 21, 2014

Label companies continue to make for attractive acquisitions.

At the 2014 AWA Mergers & Acquisitions Executive Forum, speaker Jim Hill, partner with Benesch, Attorneys at Law, emphasized the “huge pent up demand” of equity in the US. “Strategic buyers have $1.8 billion in cash on their balance sheets. What’s lacking is inventory,” Hill said.

The AWA event, held May 5, in Chicago, focused on M&A activity in a variety of markets – coating, laminating, converting and packaging. Thomas Blaige, chairman and CEO of investment bankers Blaige & Company, presented data from its research on how the number of transactions has increased significantly from 2001 to 2013, and that in 2001, 85% of all buyers were strategic, but in 2013 that number dropped to 65%.  The entire packaging value chain – from machinery, materials, processors to key packaging end users – is seeing continued growth in mergers and acquisitions.

Another presenter at the AWA M&A forum was Bill Hornell, managing director, investment banking, at Chicago-based Mesirow Financial, an independent diversified financial services firm. With more than 25 years experience in the paper and packaging industries, Hornell has completed over one hundred M&A transactions since joining the firm in 1988.

We recently caught up with Hornell to discuss the state of M&A activity in today’s label market. 

L&NW: How would you describe the current Mergers & Acquisitions situation in the pressure sensitive label industry?

Bill Hornell: The M&A market in the label industry is strong, and it’s due to the label industry having characteristics that make it attractive to both strategic and financial buyers. Number one, it’s a growing market, and secondly, there is opportunity for product development – different types of labels and new applications. Another perk is that it’s also a fragmented industry with a lot of participants.

L&NW: How would you sum up who is doing the buying and selling? 

BH: There have been a number of recent transactions in the industry that reflect a variety of markets and company sizes. Last year, we represented TVC and its sale to MEI, both mid-sized label companies. Multi-Color and CCL are making acquisitions domestically and internationally, showing that the largest organizations have a willingness to acquire mid-sized label businesses. And in some cases, the acquired companies are relatively small – some the specialty beverage and pharmaceutical label deals CCL and Multi-Color have recently done have been for companies with $10 million or less in revenue.

L&NW: What’s happening with M&A activity with regard to companies outside the label sector that may want in?

BH: I think the area where we’re seeing the most tangential activity is equipment oriented – companies in the narrow web flexible packaging area who are familiar with narrow web printing. These companies would be more comfortable making the jump to narrow web label printing.

There are products that sort of bridge both worlds, like a shrink label, for example. A shrink sleeve is a label, but its certainly has flexible packaging characteristics to it, and it’s an area that’s growing rapidly. Printing shrink labels requires narrow web printing capability. To me, this is an area where you see the most “toggling” back and forth.

L&NW: What does the future hold for M&A’s in the label market?

BH: I think the label sector will continue to be a strong marketplace. Credit markets are as accommodating, and frankly even more accommodating today as they were prior to the recession of 2008. The credit spigot is wide open.

With all the liquidity that has been pumped into the system, and with interest rates at historic lows, credit is readily available. In all sectors of packaging, we’re seeing M&A transactions with large acquisitions being made by private equity groups using their leverage, and who have equity under management to invest.

I think there will always be room for a well-run label business or a well-run flexible packaging business being able to thrive as independents. However, it’s a terrific marketplace. If you’re a business owner in the label and narrow web area, and you’re thinking of some type of ownership transition, it’s a terrific time to explore possibilities.

Traditional commercial printers that are facing headwinds in their commercial print industry are looking at packaging as being a very attractive market to be in. Labels and packaging – driven by the food and beverage industry – have proven themselves to be less sensitive to the economy than other sectors – and that’s appealing.

L&NW: What advice would you offer a label converter that’s seeking an acquisition?

BH: The hard work starts after the deal is done. For any business owner making an acquisition, getting the deal done is half the story.
The other half – or even more than half, is the integration work – making sure the cultures fit, making sure the people fit, and making sure the customers are taken care of.

L&NW: How might you advise a label converting company that is looking to be bought?

BH: There are both strategic and financial buyers that are looking at opportunities in the label and narrow web space. The industry is so attractive right now, with so many positive attributes, I don’t think you would have to artificially package your business.
The label industry is strong enough, that if you have a well-run label company, it will be sought after in the market.

Inflation: It’s coming
By Brian Gale, president, I.D. Images

Lately, a lot of attention has been focused on income inequality in the US. It is not uncommon to read an article or hear a pundit talking about real wages being stagnant for the middle class over the last decade. In other words, wage increases have been less than inflation. Most of these discussions center on wage increases being too low, relative to the productivity increases economists measure. Maybe it’s time to change the conversation to the other side of the equation: inflation.

Commodities are going up. Let’s go back to Economics 101: supply and demand. Clearly, demand remains relatively flat in the world economy. US Q1 GDP was negative. China has slowed down. Europe appears to be recovering, albeit at a snail’s pace. So we turn to the supply side of the equation. Some weather disruptions certainly contributed to the increases in commodity prices year to date. A much larger contributor, however, is the growth in money supply. In 2014, US money supply has increased a little more than 6% YTD. Funny, commodities have increased about 8% year to date. I don’t have a Ph.D. in economics, and my simplified math would embarrass my business school professors, but it’s pretty clear to me that a majority of the increase in commodity prices is driven by the increase in money supply. As long as the Federal Reserve keeps monetary policy loose, expect commodities to go up. As long as demand remains stagnant, expect wages to remain relatively stagnant. What does it mean? More of the same: consumers’ purchasing power will continue to decrease.

What does this mean for those of us hawking sticky paper?
1. Disgruntled employees who see their costs go up faster than their wages. Health care, food, and gas – three things we all buy – will continue to go up. We don’t have pricing power to increase our prices. With demand stagnant as well, it’s tough to raise wages to compensate for cost of living increases. Meanwhile, in the convoluted way the government reports inflation (for example, with food and energy), the headlines will show “tame” inflation.

2. See the “tame” inflation comment. As I’ve said in the past, it’s tough to raise prices when the government is telling our customers there’s no inflation. We all know the truth, but the headlines don’t help our argument.

3. Sooner or later, the dam will burst and raw material costs will go up. A good vendor friend told me they need a price increase because of the raw material increases they’ve seen. After I got done laughing at him, he admitted it’s going to be a tough task to get one through in the near future. It will happen, but not until demand picks up (unless a major world event shocks the economic system, which could very well happen). My guess is it might be late this year or early next year.

What should you do?
1. Employees: Honesty is the best policy. Share data.

2. Customers: Continue to keep them abreast of costs as well. They face the same pressures we do. They won’t like it but they’ll understand.

3. Prepare for cost increases. They’re coming.

About the author: Brian Gale is the president and majority owner of I.D. Images, a leading pressure sensitive label converter headquartered just outside of Cleveland, OH. Since Brian joined I.D. Images in 2003, the company has more than tripled in size. Brian completed a successful management buyout of the company in 2007.  He is an active member of TLMI (Tag & Label Manufacturers Institute), serving on its board of directors. He is a frequent speaker at business and industry conferences.