Regulars / M&A | 27M&A in the labels and packaging industry: What you need to know nowThe labels and packaging market is still a great space for M&A, but economic factors make it more difcult to get deals done, writes Bob Cronin of The Open Approach“Entrepreneurs interested in selling or buying need to be aware of these arising issues and evaluate their own situations against them”For investors looking to make a deal — of this increased available capacity and or entrepreneurs considering an addition customer pricing pressure will intensify — we’ve reached a point where borrowing competition, further lowering margins and costs may impede (or even outweigh) the opportunity. upside of a potential investment. It’s thus Issues in refnancing existing deals — critical that every organization thoroughly Many previously completed deals are ver the last couple of decades, evaluate all possible funding sources coming to the end of their original terms. labels and packaging have been and leverage points before considering However, with signifcant interest rate a boon for M&A. Indeed, our any target. rises and qualifcation changes, refnancing Oindustry has been part of some of the Reduced debt position for lending — will be more challenging. Our industry world’s most signifcant strategic and Risk is becoming a lot less desirable than it issues and fnancial market pressures will private equity transactions. used to be. Rising costs and lower profts necessitate new terms — including the We’ve had all the elements for M&A have hurt numerous industries and put possibility for banks to require notable success, most notably: many previously successful entities out increases in investor funds to achieve the • High-proft operation of business. Those who have fnancially next round of fnancing. Such requirements • Near- and long-term industry growth supported these businesses have taken the will impact investor groups’ ability to make • Double-digit market segment growth brunt of the pain. Thus, the amount of the additional investments.• Fragmented industry with potential to overall debt that banks are taking on in I have always said that labels and consolidate an acquisition has declined. Even in labels packaging is a great space for M&A, and it • Opportunities in various categories / and packaging, where lenders had typically still is. The above factors just make it more segments to gain advantage or dominate been eager, they are now backing down. If diffcult to get deals done. Transactions will • Low capital commitment fnancing is actually approved, it’s at greatly not stop; however, we can expect to see • Ability to fnd numerous fnancing reduced positions, a trend that is likely to the valuations and transaction structure sources for deals continue — and perhaps even worsen — in change around these circumstances. While the majority of these elements the near term. This signifcantly reduces the Entrepreneurs interested in selling or remain, the last — and most important return opportunity for investors. buying need to be aware of these arising one in fueling activity — is falling short. Higher risk and less upside for investors issues and evaluate their own situations Economic changes and uncertainty have are bringing lower valuations, a lower against them. I am always happy to discuss driven rising economic skepticism. Thus, debt position, and more scrutiny to any your opportunities and expectations.our current market faces hurdles in fnding, transaction. This is making investors a lot Investment timing is always important, funding, valuing and completing M&A more analytical in their due diligence. but you also need to be aware of the deals. And this is quickly crushing many Future potential does not match current environment and obstacles you would-be opportunities for our industry’s recent results — Typically, deals are might face. Deals can and will be done entrepreneurs. crafted based on historical performance but at a price that takes all things into Let’s look at today’s most notable issues: (which helps substantiate projections). consideration. Higher cost of capital — Over the last Yet near-term expectations and fnancial 10 years, global business has enjoyed some models are hampering expectations. Our Bob Cronin is managing of the lowest lending rates for everything industry is coming off record results, but partner of The Open from capital equipment purchases through growth and proft forecasts do not show Approach, an M&A acquisitions. With interest rates escalating, the same trajectory. consultancy focused deals are a lot more expensive than they Our industry is under new pressures. exclusively on the world were in previous years. While we are Infation and customer cost-cutting have of print. To learn more perhaps nearing an end to a lengthy cycle weakened demand. At the same time, there about The Open Approach, of rate increases, the cost of capital is now is a supply glut due to overstocking during visit www.theopenapproach.net, email higher than it’s been at any other time in the previous peak market, which is causing Bob Cronin at bobrcronin@aol.com, the last fve years. material prices to slide. The combination or call or text +1 630-542-1758.Oct - Dec 2023