Packaging Industry Report | Q1 2024

Q1 M&A Update

Index of Consumer Sentiment

• While much of 2023 was hampered by rising interest rates, recessionary concerns, shifting consumer demand, destocking initiatives, depressed M&A valuations, and transaction volume, the beginning of 2024 marked a notably brighter outlook for the year ahead.
• Industry participants across multiple sectors saw the beginnings of a return to normalcy in Q1 2024, particularly those in CPG-related markets, as consumer confidence and spending continued to gain and provide a rosier outlook for the rest of 2024.
• Packaging businesses with strong, resilient foundations remain highly attractive to strategic and private equity buyers. Top-tier companies are expected to continue to sell at premium prices.
• Alongside this increase in consumer sentiment, TKO Miller has seen an uptick in discussions with new packaging prospects and pitch activity has tripled (Q1 2024 compared to Q1 2023) as our deal pipeline continues to grow.
• TKO Miller is increasingly confident that packaging transaction activity will continue to ramp up during 2024 as family- and founder-led businesses prepare to transact and buyers are under increasing pressure to deploy capital.

Global Private Equity Dry Powder

• Increased borrowing costs, macro and operational risks, and a strained global debt market brought private equity M&A volumes down to a 10-year low in 2023, while private equity exit activity saw a 10-year low (per PitchBook).
• 2023 saw the average holding period for private equity increase to over 5.8 years. The first quarter of 2024 has seen that decrease to around 5.5 years, still high, but trending down.
• According to the Preqin database, April 2024 saw a 0.01% decline in Private Equity dry powder, its first non-growth month in a decade, though the decrease was nominal.
• Despite these headwinds, M&A activity is set to rebound in 2024. The stable interest rate environment and pressure on private equity investors to deploy its historically high dry powder and monetize some portfolio companies leads us to expect 2024 to be robust for dealmaking.
• Expected interest rate cut(s) will add a further boost M&A transaction activity by reducing the cost of capital necessary to fund acquisitions for all buyer types.
• Relatively high interest rates have made it difficult for buyers and sellers to get together on valuations, but decreased financing costs may also help bridge the gap between seller price/structure expectations and buyer financial capabilities and return expectations.
• TKO Miller’s recent discussions with leading private equity-owned packaging companies confirmed that several are preparing to go to market in the next few months. Fund managers continue to face pressure to return profits to investors and they will find a viable exit from portfolio companies.

MIDDLE MARKET M&A VALUATIONS FOR PACKAGING SUBSECTORS (Q1 2024 EV / EBITDA)

• Valuations multiples in Q1 2024, as compared to Q4 2023 were strong across each subsector. In the most recent quarter, all sectors but Metal & Glass saw an increase in valuation multiples, especially flexible plastics and corrugated & packaging which are tied to rebounding consumer sentiment.

Publicly Traded Packaging Company Valuations

TKO Miller North American Packaging Index (Quarterly EV / EBITDA Multiples)

• Transaction valuation multiples in Q1 2024 experienced a resurgence due to the gradual resolution of destocking issues within the supply chain and a more consistent inflationary climate.

Publicly Traded Packaging Company Valuations by Sector

Annual EBITDA Multiples by Sector

• The improvement in the Trailing-Twelve-Month (TTM) EBITDA multiples observed in all four packaging sectors indicates a continued rebound in 2024 from the declines experienced over the previous two years.

TTM Market Performance by Sector

• The uptick in market performance was a continued trend from Q4 2023 and is expected to continue through 2024 due to improved inventory levels and a stabilized inflationary environment.

Q1 2024 Notable M&A Transactions

PACKAGING NEWS AND NOTEWORTHY ARTICLES

IoT is Ripe to Disrupt the Packaging Industry

The Internet of Things (IoT) boasts the potential to streamline existing processes used across the packaging industry, according to an article published by Packaging Gateway. IoT refers to a network of connected devices that monitor, control, report, and act on data, making it much easier to understand and analyze product life cycles. IoT sensors provide real-time data for monitoring asset performance, which can be analyzed by AI to boost transparency, sustainability, and reduce on-hand inventory. Potential areas of innovation include tracking data on individual items of packaging throughout the supply chain or smart e-waste management to ultimately reduce the impact of packaging waste globally. LINK

North American Pulp and Paper Industry Bouncing Back

In 2023, North American pulp, paper, and forest products companies faced challenges with an 8.6% decrease in combined sales to $109 billion, and a significant 76.6% drop in earnings to $2.4 billion compared to 2022. A majority (75%) reported weaker sales, with eight firms experiencing double-digit revenue drops. Profitability was strained, with eight companies reporting losses and only five showing profit increases. Price declines, softer demand, and oversupply impacted the industry. Moving into 2024, there is already a partial recovery in demand and prices, with forecasts indicating growth in corrugated box shipments and printing paper demand. LINK

Brand Owners Prioritize Packaging and Sustainability More Than Ever

According to L.E.K.’s packaging study conducted in Q4 of 2023, brand owners increasingly view packaging as crucial to product sales and are willing to invest more in it – despite the challenges of rising costs. The study reveals a heightened focus on sustainability, with 70% of brand owners having changed packaging materials in the past four years to improve sustainability. Further, brand owners believe they can pass on a 3% increase in packaging costs without affecting sales significantly. Inventory levels across end markets are expected to normalize over 2024, relieving the destocking pressure faced by converters in 2023. LINK