According to the latest report from national accountancy and business advisory firm BDO LLP, Transaction volumes in the UK plastics industry have fallen sharply by 75% in the second quarter of 2020.
The ‘A Sustainable Future - Plastics’ report has revealed that lockdown had a severe impact on the sector, with only three deals being completed between April and the end of June 2020. This compares to 12 transactions in Q1, following a relatively muted deal-making environment in 2019. In total, 25 deals completed in the UK market last year, as buyers held off waiting to see the outcome of the General Election.
Valuations in the plastics sector were on the increase before COVID-19, and despite the global pandemic, these have held firm with record levels of cash to deploy, alongside international acquirers. The average current year EBITDA multiple for quoted companies is 9.5x EBITDA.
The report showed that deals in 2020 have notably been in high-IP technology products serving industrial sectors, as well as packaging and PPE. Until lockdown, there was also an increasing level of private equity interest and a resurgence of deal appetite in Q1 2020. This mirrors 2019 figures that show private equity was involved in 24% of total deals.
Roger Buckley, M&A partner at BDO LLP, explained: “The changing regulatory environment, further consolidation of a fragmented market, and greater clarity on the political landscape, all point to a likely upsurge in M&A activity in the plastics sector in the coming year, subject to the ability for government policy to thwart a second spike in cases of COVID-19.
“We have seen a vastly different response in buyer appetite following COVID-19 compared to the financial crash of 2007-08 when buyers were scarce. Currently, we see more buyers than sellers, as companies seek to position themselves for the medium to long term and are attracted by the lure of potentially reduced valuations.”
Anticipated consolidation in the sector, and a strong upturn in M&A activity, is in response to four M&A drivers – increased regulation, consumer pressure in respect of sustainable production, margin pressure and geographic drivers. Cross-border M&A accounted for 33% of deals in 2019, and it appears that geographic expansion may be an ongoing theme in the sector as the requirement to have greater control of the supply chain becomes more prominent.
Roger added: “While the market faces new and significant challenges, it is underpinned by strong, long-term consolidation drivers which should help to uphold an investment thesis and support valuations as M&A returns.
“Although we expect there t