By Jennifer Dochstader
Over the past three
years the North American label printing industry has witnessed
an unprecedented rise in acquisition activity. The ownership
of companies across revenue ranges is increasingly changing
hands — some acquired by strategic investors (printing and
packaging conglomerates) and some by financial investors
(private equity firms and financial services companies). The
evolutionary foundation upon which our industry was built is
shifting as the entrepreneurs who founded companies in the
1960s, ’70s and ’80s are approaching retirement age in a
market where private equity capital has never been so
plentiful, nor valuations so high. This article explores some
of the options available to label company owners today, in the
hope of providing assistance as they navigate the complex
waters of acquisition and the positioning process.
 For
many owners, it’s hard even to begin contemplating the notion
of selling. Many of these industry pioneers have been at the
forefront of innovation and, press by press, square foot by
square foot, they have grown their companies into the
successful manufacturing profit centers they are today. Other
owners, however, take a different, more circumspect view.
They’ve seen the decades of booming growth come and go and as
raw material prices continue to escalate and cost-cutting
pressure from their customers continues to rise (while label
vendor loyalty seemingly plummets), these owners are ready to
take a hard look at their options, understanding that there
has been no better time to position a label company for sale.
One of the primary forces at work in creating the current
“seller’s market” scenario is the flood of private equity
capital available today to invest in privately held
businesses. John-Michael Girald, principal of the Bigelow
Company, a New Hampshire, USA based private investment bank
that has worked with label printing companies, comments on
today’s private equity landscape. “In our database alone we
have more than 1,000 private equity firms who have each raised
more than $100 million in private equity capital. If you do
the math, that’s around $100 billion worth of purchasing power
out there today and they’re investing in private companies
across the country. It’s a unique situation for the private
company owner, because all of a sudden they have a multitude
of entities wanting to bid on their business, and it is
driving prices up.”
Why the present private equity frenzy? Analysts claim that
there are a host of explanations for this, and Girald
attributes it to several key factors pervading the
marketplace. “Everyone has asset allocation for their own
portfolios,” Girald continues, “and as the Sarbanes-Oxley Act
has imposed strict accounting rules onto public companies, it
makes less and less sense for small public companies to
actually be public. As part of everyone’s asset allocation
they always invest a percentage of their money in small cap
stocks, and as these stocks go away due to forces like
Sarbanes-Oxley, to satisfy these small company portfolio
requirements they’re looking to private equity which invests
in small companies in a liquid market.” The graph on this page
illustrates uninvested private equity capital growth over the
course of the past decade.
For many label company owners, the world of private equity is
an unknown. Historically, an owner considering the sale
process might sit down with one of the known acquiring
“strategics” — a CCL, a WS Packaging, or a Clondalkin, for
example. Said owner might think his or her company is a good
fit for one of these conglomerates given the company’s
application mix, or technology base. Some owners still view
this as their best bet scenario.
Girald believes, however, that this approach is often not in
the owner’s best interest. “In our view, the strategic
investors have their own opinion of the industry, and what we
found is that the strategics often had a lower opinion of the
value of a business than the private equity firms. You might
get a strategic coming in with a valuation of four to five
times [four to five times EBITDA] even though a company
warrants a higher valuation. No matter how you try pitching
this company to a group of strategics, they have a set
valuation for what they pay for companies because they believe
their industry experience justifies that number.” The graph at
right illustrates debt multiples over the course of the past
decade.
Strategic investors might not want to generally boost
valuation offerings, but there are some situations where a
label company might be uniquely positioned to deliver its own
differentiating value proposition — with RFID, for example —
and in this situation a strategic investor might be willing to
pay beyond the limits of the private equity universe.
Both strategic and private equity investors can deliver a
scenario that is in alignment with the desires of the private
company owner. Burgaw, NC, USA based Prestige Label was
recently sold to Atlantic Packaging, a family owned company
active in commercial and customized paper and paperboard
converting. Elisha Tropper, the former president of Prestige
Label, comments on his company’s journey in the acquisition
process.
“A priority for us was to make sure that whoever bought the
company was going to keep the company in its current location
and retain the employees. Atlantic was the perfect buyer.
They’re a large company with eight locations in the United
States and a few in Latin America, yet their headquarters are
20 minutes from our plant. Prestige Label offered an extension
of their production capabilities, not duplication.” According
to Tropper, over the course of the past 18 months, the company
had received multiple offers from both strategics and
financial investors. The majority of those offers however
would have meant shutting down the plant and consolidating the
business with other small and mid-sized private companies,
consolidating in order to drive costs out while keeping the
customer base and production equipment.
Another key driver to the spike in present day merger and
acquisition (M&A) activity is the renewed appeal of the
packaging sector, and specifically within it, the subsectors
of labeling and flexible packaging.
Louis Mitchell, Managing Director for Chicago-based Mesirow
Financial, completed 14 different transactions in the
packaging arena in 2005 and has completed seven so far in
2006. “I’ve never seen markets like this in the manufacturing
sector,” Mitchell states. “M&A activity is at an all time high
and private equity firms like the packaging sector. They see a
subsegment like labeling as being fragmented, so they see an
opportunity in trying to consolidate the sector.”
Mitchell and Girald hesitate to predict how much longer the
boom in private equity interest in labeling will remain. But
both caution that if the credit markets contract and banks
become increasingly conservative, financial buyers won’t be
able to raise appropriate amounts of leverage and valuations
will be directly impacted. In terms of the strategic
investors, when the stock market declines over a certain
period, they’re not going to be able to use capital to acquire
companies, and that could result in a potential shutting down
of both avenues for label printers intent on selling.
Today, the modus operandi for any label converter interested
in selling is to create as much competition as possible when
positioning the company. Sure, letting the acquiring strategic
investors out there know your motives is a wise move, but
don’t rule out what the private equity universe might be able
to provide. As Girald explains, “If you’re an owner of a
private label company, all of your net worth might be tied up
in your company. You might have paid off your mortgage, you
might have some nice cars in your garage and a small
portfolio, but the vast majority of your capital is tied up in
your company. It’s illiquid. And what a private equity firm
enables a private business owner to do is to diversify his
concentration. A private equity firm comes in, offers cash,
and now the owner can take his capital out of the company and
put it wherever he wants while still maintaining a piece of
the business. The owner gets the benefit of being able to
still grow the company and someday that private equity firm is
going to need to sell the business to get their own return,
and at that time the owner gets a second bite of the apple.”
A piece of advice to business owners: Don’t hang up the phone
when contacted by credible investment banks, brokerages and
strategics. Give them a few minutes of your time if selling is
on your radar screen within the next half decade. Competition
creates the best value, and exploring all of the options
currently available in today’s market just might present you
with the opportunity of a lifetime.
 LPC
2007
Over the past four
years, LPC has been involved in every aspect of the label
company acquisition process: helping label converters position
themselves and assisting financial firms and strategic
investors with due diligence requirements. LPC also provides
market research and consulting services to companies in the
printing and packaging industries, working with companies at
every level of the packaging supply chain; consumer packaged
goods companies, printers, and equipment and consumables
suppliers. For questions from the general to the specific
regarding acquisitions and sales activity please contact
Jennifer at
jennifer@printamericas.com.
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