Packaging Market Update – May 2024

Packaging Market Participants Seek Sustainable Alternatives, Driving Deal Activity

The Packaging market has focused on value creation through competitive advantages in 2024 as pricing power won during the pandemic has shrunk amid subsiding input costs and improving supply chains. This has perpetuated a competitive pricing environment that has focused on leveraging cheaper and more sustainable products. Buyers have sought to make acquisitions to bolster offerings and create synergies in order to remain competitive, which Capstone expects will bolster sector deal activity in the near-term. The Producer Price Index (PPI) for Pulp, Paper, and Allied Products: Wood Pulp has fallen 15.4% year-over-year (YOY), according to the U.S. Bureau of Labor Statistics.¹ This decline impacted the bottom line for many packagers, including leading sustainable packaging product manufacturer, Sonoco Products (NYSE:SON). Sonoco’s revenue was negatively impacted by an increase in Old Corrugated Containers (OCC) prices, up from $38 per ton in 2022 to $92 per ton in 2023, according to an earnings transcript.² As Packaging sector players navigate fluctuating input prices and begin to embrace enhanced supply chains, strategic adaptation has become imperative for sustained success.

Coupling price stabilization with volume upticks across substrates over the last several months, Packaging sector M&A activity has started to accelerate, boding well for a robust 2H’24. Branded, sustainable, and product innovation are highly sought out attributes by the investor universe.

Mike SchumacherManaging Director, Capstone Partners

Sector Paperization Comes to Dominate the Sustainable Packaging Landscape

Increased emphasis on sustainability practices from consumers and regulators has prompted packaging providers to invest in environmentally friendly products. As a result, packagers have accelerated their use of recyclable packaging solutions and mono-materials, and elevated transparency surrounding environmental footprint. Leading players have indicated that sustainable packaging has substantial growth prospects. Notably, the sector trend of paperization has come to dominate the Packaging market with leading public players moving to capitalize on the emerging growth opportunity. Sealed Air (NYSE:SEE) has announced the introduction of a paper Autobag segment and other sustainability pieces surrounding high recycled content in their Protective business, according to its Q4 earnings conference call.³ As companies across all industries aim to improve sustainability throughout the value chain, paper converters are expected to benefit immensely as the material offers a practical and sustainable packaging format due to its flexibility, recyclability, and biodegradability. Of note, Sonoco delivered strong EBITDA margins of 15.7% in Q4, on par with margins from the prior year, driven by record performances in its Consumer Rigid Paper Cans and Flexibles businesses, according to the earnings call transcript.

In addition to paper, ocean-based feedstock technologies have entered the market as a clean, rapidly growing alternative source to plastic. Of note, EcoEnclose and Sway have collaborated to develop a biomaterial line of folding carton using seaweed-based clear film windows; demonstrating the increased use of chitin—naturally occurring polymer found in shells of crustaceans such as shrimp. Amid shifting demand, sector players have bolstered their sustainable paper product offerings. In January 2022, global packaging provider and converter Amcor (NYSE:AMCR) launched AmFiber, a paper packaging line, according to a press release.⁴ With AmFiber, Amcor intends to gradually extend its new paper-based offerings into a wide variety of applications.

M&A Volume Demonstrates Defensibility as Sector Players Scale Operations

Packaging market merger and acquisition (M&A) activity year-to-date (YTD) has paced deal volume from prior years, with 57 deals announced or completed. Equipment manufacturers have been more frequently than the prior 2023 period, increasing 133.3% YOY from six deals announced or completed in YTD 2023 to 14 deals in YTD 2024. The sharp rise can be attributed to packaging manufacturers’ desire to scale operations and adopt sustainably advanced and efficient equipment to meet customer demand. Metal and glass manufacturers have experienced a slight uptick in buyer appetite, comprising eight deals in YTD 2024 versus six in the prior year period. Transaction growth in the Metal & Glass segment was expected as it has been deemed more sustainable and reusable compared to its Plastic segment counterparts, which fell 4.2% and 14.7% YOY, respectively, as regulations and customer demand have evolved.

Private strategic (42.1%) and private equity add-ons (38.6%) dominated sector M&A activity in 2023. Notably, YTD 2024 deal activity from public strategics maintained a similar distribution YOY, making up 12.3% of all deals compared to 10.3% in YTD 2023. Meanwhile, private equity platform investments maintained 7.0% of announced or closed transactions to-date. YTD 2024 saw private strategic buyers expand their presence to 42.1% of all transactions announced or completed, a 50% rise compared to the prior year period. The imperative to stay ahead of competitors and win business is expected to fuel strategic buyers to consolidate the market, creating near-term deal flow. Private equity firms are also expected to buoy M&A activity as buyers (who are armed with a record $1.6 trillion in dry powder reserves) and as sellers (who are exiting portfolio companies with overextended holding times).

Sector transaction values have shown improvement in YTD 2024, with total disclosed deal value totaling $1.3 billion, excluding International Paper’s (NYSE:IP) transformational acquisition of DS Smith (LSE:SMDS) for $9.9 billion (see transaction highlights for details). This represents a 236.5% increase compared to the prior year period’s total value of $397.9 million. The average M&A EV/EBITDA multiple in YTD 2024 was 8.7x, outperforming the historic average of 8.6x. Public company multiples in Capstone’s Packaging Index have demonstrated similar resilience, with an average of 9.4x EV/EBITDA over the last twelve-months (LTM).

Packaging Market Landscape Evolves as Buyer Competition Heats Up

Transformational investments by strategic and financial buyers have materialized in the Packaging market through YTD 2024. These acquisitions have been used to bolster supply chains, operations, product mixes, and market share. Buyers have been willing to allocate significant amounts of capital to gain a competitive edge, fortify sustainability practices, and enter niche markets. Notable transactions demonstrating buyers’ sustainability and synergy initiatives are highlighted below.

• FCA Acquires Greentree Packaging and Lumber (April 2024, Undisclosed) - FCA, a leading manufacturer of customized industrial protective packaging solutions and a Wynnchurch Capital portfolio company, acquired Greentree Packaging and Lumber in April 2024. Terms of the deal were not disclosed. Headquartered in Texas, Greentree manufactures custom wood packaging and distributes lumber products. The deal marks the first acquisition by FCA since it was acquired by Wynnchurch (July 2022, undisclosed). The deal will be used to enhance Wynnchurch’s new portfolio of packaging providers, and follows its April 2024 acquisition of Handgards, a leading distributor of foodservice packaging (undisclosed).

“Greentree represents an opportunity to continue to grow FCA’s custom packaging portfolio in an attractive Dallas/Fort Worth market. We commend Robert and the Greentree team for the impressive growth they have achieved since founding the business in 2014, and we are excited to partner with them to support the continued expansion of the FCA platform,” said Neel Mayenkar, Partner at Wynnchurch, in a press release.⁵

• Veritiv Acquires AmeriPac (April 2024, Undisclosed) - Veritiv, a leading specialty distributor of value-added packaging, facility solutions, and print products and solutions, acquired AmeriPac for an undisclosed sum (April). AmeriPac is a provider of turnkey contract packaging and fulfillment services with approximately $60 million in annual revenue, according to a press release.⁶ The acquisition follows Veritiv’s February acquisition of Vivabox Solutions (undisclosed), which is highly complementary to Veritiv and AmeriPac’s end-to-end kitting and co-packing capabilities. The two deals follow the acquisition of Veritiv by private investment firm Clayton, Dubilier & Rice (August 2023, $2.9 billion) and demonstrates the company’s commitment to expand as a leading provider of kitting and packaging solutions.
• International Paper (IP) Announces its Acquisition of DS Smith (March 2024, $9.9 Billion, 1.1x EV/Revenue, 7.2x EV/EBITDA) - International Paper (NYSE:IP) announced its acquisition of DS Smith (LSE:SMDS) for an enterprise value of $9.9 billion, equivalent to 1.1x EV/Revenue and 7.2x EV/EBITDA (March). The transaction pricing was an improvement to Mondi’s (LSE:MNDI) proposed acquisition valuation of $9.0 billion in enterprise value at revenue and EBITDA multiples of 1.0x and 6.5x, respectively. The improved deal was approved by DS Smith’s board of directors and is expected to close by Q4 2024 to create a global leader in sustainable packaging solutions, according to a press release.⁷ The post close integration of approximately 500-600 thousand tons of containerboard from DS Smith into the IP mill system will likely increase the combined integration rate to approximately 90%, with synergistic value creation forecasted to be $514 million in pre-tax synergies.

"The combination with IP is an attractive opportunity to create a truly international sustainable packaging solutions leader that is well positioned in attractive and growing markets across Europe and North America. It combines two focused and complementary businesses. DS Smith has grown significantly through a dedication to customers, focus on innovation, quality of packaging and high levels of service. In a dynamic sustainable packaging landscape, the combination will enhance our global proposition to customers, create opportunities for colleagues and drive value for shareholders who can remain fully invested in such an exciting business,” commented DS Smitch CEO, Miles Roberts, according to the press release.

To discuss the impacts of sustainability initiatives, provide an update on your business, or learn about Capstone's wide range of advisory services and Packaging market knowledge, please contact us.

Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.

Endnotes

1. U.S. Bureau of Labor Statistics, “Producer Price Index by Commodity: Pulp, Paper, and Allied Products: Wood Pulp [WPU0911],” https://www.bls.gov/, accessed April 30, 2024.

2. Seeking Alpha, “Sonoco Products Company (SON) Q4 2023 Earnings Call Transcript,” https://seekingalpha.com/article/4670564-sonoco-products-company-son-q4-2023-earnings-call-transcript, accessed April 29, 2024.

3. Seeking Alpha, “Sealed Air Corporation (SEE) Q4 2023 Earnings Call Transcript,” https://seekingalpha.com/article/4673965-sealed-air-corporation-see-q4-2023-earnings-call-transcript, accessed April 29, 2024.

4. Amcor, “Amcor launches new platform for paper-based packaging,” https://www.amcor.com/media/news/amcor-launches-new-platform-paper-based-packaging, accessed May 7, 2024.

5. Wynnchurch Capital, “FCA Packaging Invests in Greentree Packaging and Lumber,” https://www.wynnchurch.com/news/fca-packaging-invests-in-greentree-packaging-and-lumber, accessed April 29, 2024.

6. Veritiv, “Veritiv Acquires AmeriPac,” https://ir.veritiv.com/newsroom/Press-Release-Details/2024/Veritiv-Acquires-AmeriPac/, accessed May 7, 2024.

7. PR Newswire, “International Paper Announces Agreement to Acquire DS Smith,” https://www.prnewswire.com/news-releases/international-paper-announces-agreement-to-acquire-ds-smith-302117601.html, accessed April 29, 2024.