Dealmaking in the broader packaging industry remained muted through the first half of 2023, as the industry continued to work through the supply chain dislocation resulting from COVID-19. However, there are signs of strength heading into 2024 for packaging M&A activity.
In the M&A market, strategic buyers have been especially active, while financial sponsors have mostly remained on the sidelines given the less favorable conditions in the lending market. After consumer packaged goods (CPG) companies built up large packaging inventories amid pandemic-related supply chain disruptions, CPGs have been destocking packaging, coinciding with softer consumer demand for their products. Packaging companies, to offset this resulting lack of growth, have turned to strategic acquisitions with synergies – in several cases, through bilateral discussions outside formal bid processes.
That strategic activity has led to valuations remaining near historical levels for packaging companies – even in a high-interest-rate environment and a broader M&A slowdown. Current dealmaking in these circumstances is complex, necessitating enhanced data and analyses.
Much of that analysis relates to unpacking price and volume impacts, as companies across the packaging industry are growing earnings by raising prices to offset increases in raw material and operating expenses and softer demand driven by the recent destocking trends. Parties looking to make an acquisition or sell their business – especially those accustomed to the low-inflation landscape of the past decade in which revenue growth and volume were effectively in sync – should understand just how crucial it is to determine whether a target company’s recent earnings growth is sustainable.
Indeed, companies that can show that they’re growing consistently and profitably are in high demand – and likely will continue to be even in an uncertain climate. Meanwhile, packaging companies that have had a choppier history of late, given the challenges of the past few years, are still tapping capital markets; however, they are pursuing minority investments as a sign of confidence in future performance as they look to substantiate a track record of growth and stable profitability.
A Focus on Differentiating
There are other reasons for optimism in a shifting packaging landscape. At the top of the list is increased short-run packaging production for new, promotional, and seasonal products, at times with the use of digital printing. Opportunity stems from consumer brands’ focus on shelf differentiation through product visibility, high-graphic printing, and custom sizes and designs. Digital printing plays a role here, as does the growth of interactive packaging that relies on QR codes, hashtags, and barcodes.
Another trend worth watching is the increased focus from CPGs and copackers on automation for select packaging and end-of-line processes, especially amid a tight labor market. As a result, packaging manufacturers must ensure that their packages are strong and durable enough to stand up to new automation processes versus the legacy hand-packing methods.
Sustainability at Center Stage
Increasing public focus on sustainability is set to have significant long-term impacts on the packaging industry. That was clear in March 2023, when the Biden administration announced goals to “demonstrate and deploy cost-effective and sustainable routes to convert bio-based feedstocks into recyclable-by-design polymers that can displace [more than] 90% of today’s plastics and commercial polymers” within 20 years.
The nonbinding but aggressive goals accelerated packaging manufacturers and brand owners to pivot toward more sustainable materials as a result of evolving consumer perceptions. Emerging strategies include using novel materials (e.g., bioplastics, molded fiber) and supply chain adjustments to replace or reduce the use of virgin and single-use plastic by utilizing more recycled content in plastic formulations. In addition, the European Union is cracking down on packaging waste, which will lead to reduced weight, volume, and packaging layers.
But the lack of supply for bio-based materials and the state of the world’s recycling infrastructure are not yet ready for the broad shift to sustainability, likely leading to greater investments in innovative packaging materials and circular infrastructure in the years ahead. One of the leading providers of capital investments for sustainable solutions are venture capitalists, investing more than $875 million in packaging since 2022.
On the horizon, the next point of focus we foresee will be the development and introduction of capabilities to audit and monitor adherence to sustainability goals communicated by large corporations, especially as 2025 sustainability pledges loom.
Outlook Going Into 2024
As is the case in many sectors, the slowdown in the broader M&A market over the past 18 months created a backlog in packaging deal flow. At the same time, investors are gaining clarity on several points of uncertainty in the sector that have limited their investing appetite (e.g., destocking, raw material price swings, consumer demand) and the private equity community appears ready to reemerge in the space as interest rate uncertainty continues.
Combined, these factors show promise for packaging deal flow in the coming months.
To see the full report from William Blair, click here.