If there’s one thing I gleaned from the recent International Converting Expo (ICE) in Orlando, it’s that there are a lot of regional players in the converting global market. And these regional players have a lot of potential – but only if they understand how to take advantage of it.
A quick recap of the converting marketplace. Converting is a term that can be defined in a number of different ways. I like this definition from a Converting Industry Overview from Rockwell Automation:
“Converting usually refers to some of the processes that are part of the web forming line, for example, applying a coating of adhesive to paper, or laminating pressure-sensitive label stock to backing material. Printing on corrugated board, tissue, packaging film and label material is another large and very important converting application.”
As Rockwell notes, the “demand for these product characteristics” are constantly changing. In other words, innovation continues to redefine the converting product. But the industry in and of itself is stable.
In fact, according to this presentation from PCI, global flexible packaging, for example, is a $70+ billion market that is expected to grow by around 5% over the next five years. It’s a market that seems to withstand global downturns, and in fact, is poised nicely with the increased focus on reducing packaging waste.
The biggest growth, according to PCI, seems to be in South East Asia and Oceania, with rates projected in the 15-20% range.
What really stood out to me, however, was this next statement by PCI: “The global market remains ‘local’ with regional converters supplying the fast proportion of local packing needs. Only 4% of production is traded outside the region in which it is converted.”
Local Means Lots of Opportunity
The regional strength of converting naturally results in tremendous fragmentation globally. Consider the label industry. According to AWA, there are 15,000 Label Converters worldwide, and approximately 3,500 in North America. Probably 80% or higher are under a million in sales.
With all this fragmentation on a regional level, consolidation is taking place. However, the rate of the deals (mergers and acquisitions) is slowing, a fact which was made perfectly clear at last month’s AWA Mergers and Acquisitions Executive Forum.
Why the slowdown in acquisitions? I believe it’s that we’re seeing a clash of Wall Street and Main Street playing out right before our eyes.
- Wall Street players would like to expand on a regional basis, but are having problems evaluating (and connecting) with the typical Main Street owner.
- Main Street converting businesses lack set processes and systems that would appeal to an investor.
In other words, we have a disconnect. Which is a shame, because, as PCI noted, consolidation will continue, but at a “smaller, lower cost” and that “niche converters will continue to prosper.”
What does that mean to a smaller converter? It means it’s a seller's market, my friends. It means the big money is hungry for growth, and they understand that the only way to do it in a fragmented, regional market is to buy local, and buy often.
But this breaks the mode for the traditional M&A. In the past, the merger and acquisition world was reserved for the mega-deals. The Time-Warners of the world. Bigger always seemed to mean better.
For investors who make a living off the M&A, the huge regional focus means that’s not a possibility. That’s why if you have a profitable, niche-focused converting business, an M&A could result in multiples of nine or higher!
So what needs to happen for more M&As to occur in converting? Here’s my take on what a seller should do if they’re interested in being purchased in the near-future:
- Focus on niche – Just because it’s a seller's market doesn’t mean investors will buy just anything. They are looking for niche-focused regional players, so make certain you’re distinctive from the rest. They also want to see specific financial metrics that indicate the key profit drivers.
- Consider ISO standards – We blog often about ISO 9001 standards for the printing industry. For international businesses, these standardization tools will appeal to a larger investor who wants proof of your management capability.
- Develop sustainability strategy - Environmental concerns are enormous in our industry. The big brands are now putting the onus on converters and manufacturers to adapt sustainable methods and products. Going green is not a fad, it’s a proven way to generate solid, long-term ROI.
Where are the Entrepreneurs?
As I left ICE, my biggest reaction was the same one I experienced after AWA’s executive forum: Where are the entrepreneurs?
Where are the business owners who are eager for the opportunities mentioned above?
Are they too busy? Are they too frugal to dole out the attendance fee for an event like ICE? Or are they simply unaware of the potential their packaging company has, if only positioned correctly?
Truly, this isn’t just a post about selling your business in a prime market. This is about positioning yourself so that your opportunities expand for organic growth, a smooth succession, or even a potential alliance.
The marketplace looks very favorable for regional players in the converting business. Let’s see how well we can take advantage of it.