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By Arno Schuetze
FRANKFURT, May 20 (Reuters) - A decade ago, private equity
couldn't get enough of plastic packaging. They snapped up
companies making bags, films and trays to contain everything
from food and fashion to drink to drugs, drawn by reliable cash
flows and consolidation prospects.
But now the sector's not quite so in vogue. Many buyout
firms are steering clear, and some of those holding assets are
struggling to offload them at what they consider attractive
prices, according to people involved in such deals.
This reversal illustrates how much the investment world has
recalibrated itself in a matter of years, with environmental
factors becoming dealmakers or breakers.
"No plastic packaging firm would pass our internal ESG check
and we would pass even if such an investment would promise a
large return," said Marcus Brennecke, co-head of EQT's private
equity advisory team.
"While we have invested in plastic packaging in the past –
we owned Faerch Plast from 2014 to 2017 – we would not buy a
plastic packaging firm today."
Such ESG - environmental, social and governance - risks
include new EU rules due to be brought in next year requiring
packaging to be reusable or recyclable by 2030.
Private equity investment in the global plastic packaging
sector has already slowed in recent years, with the combined
deal values in 2016-2020, of $1.3 billion, being a third lower
than in the five prior years, according to Refinitiv data.
HUNTING ECO-CHAMPS
That doesn't mean there are no deals to be done, though.
The plastic packaging market was worth $265 billion in
global sales last year, according to figures from Market Data
Forecast. Many investors continue to see the value in packaging
assets, banking on solid growth prospects as no comparable
substitute has been found for mass-market goods like food.
But they are hunting the eco-winners, which requires a close
look at the details.
This week, buyout firm Lindsay Goldberg sold food and pharma
packaging maker Schur Flexibles to Austrian investor B&C, days
after CVC sold Sweden's AR Packaging to U.S.-based Graphic
Packaging last week.
"We still consider the packaging sector to be highly
attractive," Thomas Unger, managing partner at Lindsay Goldberg
Europe, adding that the trend towards sustainability was
becoming a decisive factor.
"Companies that score points with material efficiency,
closed material cycles and the most positive ecological
footprint possible will win," he added. "Companies that fail in
this challenge will lose drastically in their value."
Partners Group, which was close to striking a deal to buy
Schur in 2019, did not participate in the bidding this time,
sources close to the matter said.
"We are very cautious about future investments in plastic
packaging firms, for reasons including ESG concerns," said
Juergen Diegruber, partner at Partners Group, whose portfolio
firm Hoffmann, a caterer, 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
proving essential, deal experts say.
Ontario Teachers' Pension Plan Board, which bought a
majority stake in Portuguese packaging maker Logoplaste in
February in a 1.4 billion euro deal, said it planned to make all
the firm's packaging reusable or recyclable by 2025 and would
increase the recycled content in its products.
Logoplaste even added ESG-linked interest costs to an
institutional term loan last year, with the level of interest
payments tied to its carbon emissions and use of recycled
plastic.
Similarly, private equity firm SVPGlobal has revamped German
packaging maker Kloeckner Pentaplast (kp) since it acquired it
in 2012.
"kp's use of recycled materials is about three times higher
than the competition. We have supported the company to set
tangible ESG targets and we were delighted when kp issued the
first-ever ESG ratchet-linked term loan in the U.S. market
earlier this year," said SVPGlobal founder Victor Khosla.
That loan also sees interest payments linked to ESG factors.
Investors are likely to pore over ESG credentials in
upcoming auctions.
Information packs have just gone out to prospective buyers
of Polish plastic packaging firm Alupol, owned by Grupa Kety
, while London-based private equity firm 3i is
expected to launch a sale of Germany-based Weener Plastics next
year.
Grupa Kety and 3i declined to comment on the upcoming
auctions.
UNDER ESG MICROSCOPE
An investment banker who worked on a European plastic
packaging deal earlier this year said the environmental factors
had been under the investor microscope.
"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 two to three years ago a
large amount of work went into preparing ESG reports this time."
Some investors said that even companies in associated
sectors face being impacted by the tougher line being taken on
ESG.
A test of this could come when with the sale of printing ink
maker Flint's flexographic unit, whose products are used to
print on plastic and paper packaging, and which asked for
first-round bids from prospective buyers earlier this month.
Flint declined to comment.
While there are doubtless opportunities to be seized in
packaging, some investors aren't willing to take the risk.
"Plastic packaging - not for us. Our teams aren't fond of
this, they'd struggle to explain it to our investors," said the
Europe manager of one of the largest U.S. private equity firms.
"And who'll buy it in five years when ESG will likely be
taken much more seriously than today."
($1 = 0.8193 euros)
(Reporting by Arno Schuetze in Frankfurt; Additional reporting
by Agnieszka Barteczko; Editing by Pravin Char)
