An uptick in spending, led by a strengthening labor market and low inflation, revealed economic growth consistent with the economy’s long-run potential. Uncertainty surrounding the Fed’s interest rate hike was hushed when, after seven years of near-zero interest rates, the Federal Reserve raised its target rate for federal funds 25bps in December. With the announcement, the Fed effectively closed the book on “free” money while signaling the US economy is again strong enough to stand on its own two feet.
Even with this plethora of positive economic and market news (excluding slowing growth in China), many public Packaging players again fell short of expectations (see "Scorecard" on page 3 of the full report). Share prices, however, mostly ignored earnings announcements and rose on average, which we can most likely attribute to persistent confidence in the sector’s future potential.
Overall the SRR US Packaging index gained 3.3% during Q4; this increase corresponded to an increase in LTM EBITDA multiples from 8.9x to 9.2x during the quarter.
Strong Packaging deal flow in the first three quarters of 2015, as illustrated by a total of 240 transactions, tempered in Q4 likely due to the sheer number of transactions already closed, the dysfunction in leverage lending and high yield markets (which constrained larger deals in particular), a strong US dollar driving up prices of US assets, and increased stock market volatility. As was the case with volume, total announced transaction value simmered to $1.3 billion for Q4 vs. $1.9 billion for Q3.
The financial sponsor share of Packaging M&A transactions diminished in Q4 to its lowest level since Q1 2011. This trend (although only representative of a single quarter) coupled with the sense that overall PE deal count slowed as the year moved along, suggests we may be in the early stages of a slump on the buy side. Several sponsors have suggested—even with alternative lenders and the Fed keeping access to debt fairly inexpensive and wide open—their appetite at valuations seen over the last twelve months appears to be waning.
Several high profile deals were announced in 2015 that left many industry followers scratching their heads as regulators approved several multi-billion Packaging transactions. Most notably, metal packaging supplier Ball Corp.’s acquisition of U.K.-based metal can producer Rexam, which is likely to close in Q2 of 2016, as well as the closed merger between two large paperboard players, RockTenn and MeadWestvaco, which produced a titan in the corrugated packaging arena now known as WestRock. Both deals (which many believed could never happen) involved significant anti-competitive inquiries which begs the two-part question—are there limits anymore in Packaging consolidation, and which mega-deals are next?
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