Mergers and acquisitions have been bustling lately in the label and package printing industry. The past several years have been highlighted by significant M&A activity, and industry experts don’t see that trend dissipating any time soon.

As part of AWA Alexander Watson’s trio of events, held alongside Labelexpo Americas in Rosemont, IL, USA, the market research firm welcomed numerous industry experts to take a deep dive into the recent M&A activity impacting the label and narrow web market.

Jonathan White, managing director, Mazzone & Associates, explored the benefits of operating in this industry, as well as some of the expected trends moving forward. According to White, “2021 was a banner year by any definition.” Even though M&A activity slowed some in 2022, it was still “pretty darn strong,” he noted.

“The net-net is we’re still in a very robust environment for labels and flexibles,” explained White. “You can’t say it about the economy, but you can say it about the industry we’re in. 2020 took a big hit, but valuations bounced back in 2021. There was a lot of activity and low interest rates, which made 2021 a great year. That year is probably the aberration, as we saw 8-9 times the multiple range.”

Many of the transactions taking place in the label and package printing space are for smaller companies, or those generating $50 million or less. While Mazzone & Associates puts that number at 74% for all acquisitions, White cautioned that the number is an estimation, as many smaller transactions go unreported.

“Financial sponsors or private equity groups have accounted for the bulk of the transactions, and that activity peaked in 2021 with nearly two-thirds of all transactions,” stated White. “Financial sponsors have retreated a little bit in the marketplace in 2022, and corporate buyers have stepped in. In a market with a lot of disruption or uncertainty, they’re going to take a step back. Financial sponsors had been paying the highest price out there, so now they’re backing out. The average price of transactions has eased up a little bit in 2022.”

White noted several factors that will impact M&A activity in the future. Inflation and interest rates will continue to impact the market, he said. Higher interest rates will reduce the current value of future cash flows. That may translate into markedly lower valuations.

For those interested in selling their company, White advised owners to know their true worth. Owners must understand their growth – how much of their business was price versus volume? Plus, supply chain disruptions and inflation wreak havoc on results. “It’s imperative for buyers and investors to understand material margin and effectively communicate that to other side of the table,” added White.

What will make your business more attractive to a buyer? Labor availability and sustainability are two such factors. “Covid accelerated these trends, but they’ve been going on for a while,” remarked White. “Young people don’t want to work in a factory making labels or shrink sleeves. You need to be able to tap into good source of labor. A common complaint is, ‘I have the equipment but I don’t have the people to run the presses.’ Are there people available to add shifts? Otherwise, I can’t push that volume through and make this acquisition work.

“In five years if you don’t have a legitimate sustainable strategy, you’re going to find it difficult to sell a company,” he added. “That’s how important sustainability has become.”

White is bullish on the future, too. “There is more availability for transactions in this space,” he said. “We serve in a lasting market, even when times are risky. Buyers are looking for growth. Our market also allows easy entry into other markets like healthcare. You can buy a label company that serves the pharmaceutical industry and ride those coattails.”

From the converter standpoint, there are advantages to acquisition. John McDowell, president, McDowell Label, a Resource Label Group Co., cited the benefits of joining the RLG family.

“Being a member of the RLG family has been an added arrow in our quiver, because we have an impeccable source of supply, especially to serve fast growing CPGs,” he said during the event.

Doug Horn, partner, Clairvest, provided the buyer’s perspective of the M&A market. With a deep respect for entrepreneurial spirit, Clairvest has set its sights on the label and package printing industry, meeting small- and mid-size businesses to learn about their opportunities and challenges. According to Horn, he has spoken to over three dozen packaging companies over last two years.

“We’ve noticed that the best label companies are growing at 2-3 times GDP growth rates,” explained Horn. “You have to invest in people and technologies, and invest back into your business.

“Revenue is a function of volume and price,” he added. “There is a correlation between net profit margin and customer satisfaction. Make sure you pursue the right customers that fit your strategy. Roll-ups have been a hot topic in our industry.”

Horn examined the big players in the market. Since 2020, Resource Label Group has acquired nine companies, Brook + Whittle has added eight companies, and Fortis Solutions Group has brought in six companies.

According to Horn, those acquisitions sold at 14-15x their EBITDA. “I would argue it’s because they had an M&A capability,” said Horn. “Every quarter those companies were closing another acquisition.”

What are buyers seeking in a transaction? The ideal company has capabilities to produce label types in the highest growth segments – generally pressure sensitive labels and shrink sleeves. Clairvest identifies customer retention and converters that maintain exposure to Tier 2 or emerging brands. Label converters must also have attractive capabilities such as digital printing, ability to produce complex decorations, and turn around orders in a quick fashion.

“It’s important to show you have differentiated advantage in the space, as well as well-maintained and up-to-date equipment,” commented Horn. “You also need a solid management track record and an ESG strategy. We’re looking for management teams to address these sustainability issues and find a solution for them. It’s not about greenwashing.”