The Fiji Times »Private Equity Falls In Love With Plastic Packaging

FRANKFURT (Reuters) – Ten years ago, private equity couldn’t get enough of plastic packaging. They grabbed companies making bags, films, and trays to hold everything from food and fashion to drinks to drugs, lured by reliable cash flow and prospects for consolidation.

But now the industry is not quite in vogue. Many buyout firms are clearly heading, and some of those holding assets are struggling to offload them at what they see as attractive prices, according to people involved in such transactions.

This reversal illustrates how much the investment world has recalibrated in a few years, with environmental factors becoming negotiators or circuit breakers.

“No plastic packaging company would pass our internal ESG review and we would be successful even if such an investment promised a significant return,” said Marcus Brennecke, co-head of EQT’s private equity advisory team.

“Although we have invested in plastic packaging in the past – we owned Faerch Plast from 2014 to 2017 – we wouldn’t buy a plastic packaging business today.”

These ESG risks – environmental, social and governance – include new EU rules due to be introduced next year, requiring packaging to be reusable or recyclable by 2030.

Private equity investments in the global plastic packaging industry have already slowed in recent years, with combined transaction values ​​in 2016-2020 of $ 1.3 billion, a third below the five previous years, according to data from Refinitiv.

ECO-HUNTING FIELDS

This does not mean, however, that there is no agreement to be reached.

The plastic packaging market accounted for $ 265 billion in global sales last year, according to figures from Market Data Forecast. Many investors continue to see the value of packaging assets, betting on strong growth prospects as no comparable substitutes have been found for consumer goods like food.

But they hunt the eco-winners, which requires careful consideration of the details.

This week, buyout firm Lindsay Goldberg sold food and pharmaceutical packaging maker Schur Flexibles to Austrian investor B&C, days after CVC sold Swedish AR Packaging to US-based Graphic Packaging last week. .

“We still consider the packaging industry to be very attractive,” Thomas Unger, Managing Partner of Lindsay Goldberg Europe, adding that the trend towards sustainability is becoming a deciding factor.

“Companies that score points with material efficiency, closed material cycles and the most positive ecological footprint possible will win,” he added. “Businesses that fail this challenge will lose value dramatically.”

Partners Group, which was set to close a deal to buy Schur in 2019, did not participate in the tender this time around, people familiar with the matter said.

“We are very cautious about future investments in plastic packaging companies, for reasons such as ESG concerns,” said Juergen Diegruber, partner at Partners Group, whose holding company Hoffmann, a caterer, is recently. switched to paper packaging from plastic to improve its environmental footprint.

SO WHAT’S THE PLAN?

Having a plan to make an acquired company “greener” is essential, say transaction experts.

The Ontario Teachers’ Pension Plan Board, which bought a controlling stake in Portuguese packaging maker Logoplaste in February in a € 1.4 billion deal, said that it planned to make all of the company’s packaging reusable or recyclable by 2025 and would increase the recycled content of its products.

Logoplaste even added ESG-related interest charges to an institutional term loan last year, with the level of interest payments tied to its carbon emissions and use of recycled plastic.

Likewise, private equity firm SVPGlobal has reorganized German packaging manufacturer Kloeckner Pentaplast (kp) since its acquisition in 2012.

“The use of recycled materials by kp is about three times higher than that of the competition. We have helped the company set tangible ESG goals and were thrilled when kp issued the very first ESG ratchet term loan in the US market earlier this year, ”said Victor Khosla, founder of SVPGlobal.

This loan also provides for interest payments linked to ESG factors.

Investors are likely to look into ESG benchmarks at upcoming auctions.

Information packs have just been sent to potential buyers of Polish plastic packaging company Alupol, owned by Grupa Kety, while London-based private equity firm 3i is expected to launch a sale of Weener Plastics based in Germany next year.

Grupa Kety and 3i declined to comment on upcoming auctions.

UNDER ESG MICROSCOPE

An investment banker who worked on a European plastic packaging deal earlier this year said environmental factors had been under the microscope of investors.

“Does the target use recycled raw materials, how good is the recyclability of its products, etc.?” A low ESG score translates into a low multiple, ”he added, referring to a company’s valuation as a multiple of earnings.

“While ESG was a marginal topic a couple of years ago, a great deal of work has gone into preparing ESG reports this time around.”

Some investors have said that even companies in associated industries are at risk of being affected by the harsher line on ESG.

A test of this could come with the sale of the flexographic unit of printing ink maker Flint, whose products are used to print on plastic and paper packaging, and which has requested first-round offers from the potential buyers earlier this month.

Flint declined to comment.

While there are undoubtedly opportunities to be seized in packaging, some investors are not prepared to take the risk.

“Plastic packaging – not for us. Our teams don’t like it, they would have a hard time explaining it to our investors, ”said the European director of one of the largest American private equity firms.

“And who will buy it in five years, when ESG is likely to be taken a lot more seriously than it is today.”

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