PE funds rework packaging investments around ESG concerns

Can private equity's decades-long love affair with the packaging industry last?

The ubiquity of packaging products means the sector has been a reliable source of cashflow for sponsors with a familiar playbook: amass lucrative contracts with consumer brands and scale up operations, often via buy-and-build strategies.

But questions are growing over whether PE funds – increasingly sensitive to ESG pressure from their limited partners – can continue in an industry that creates wasteful single-use plastic packaging.

Dealogic figures show the sector has so far resisted such pressure. This year has seen 62 deals targeting European packaging companies, already more than in 2020 and not far from the 73 in 2019. The total disclosed value of M&A in the space in 2021 stands at EUR 5.43bn, significantly below 2019's EUR 9.4bn, but not bad compared with other recent years.

Of these 62 deals, PE funds are responsible for 19, a drop from the pre-pandemic heyday, but not yet a clear downward trend. By value, they contributed EUR 3.15bn, boosted by KPS Capital's EUR 2.25bn acquisition of Crown Holdings' European tinplate business.

Recent European packaging-sector buyouts

Source: Unquote Data

Drastic for plastic
Deal activity could cool, however, as governments tighten rules for single-use plastics. In the first half of 2022, the European Union is expected to propose an update to its Packaging and Packaging Waste Directive to improve recyclability. France is to ban plastic packaging for almost all fruit and vegetables from January.

Rather than abandon the space, PE funds could rewrite their playbooks with ESG measures of their own. They could chase growth in firms developing fully recyclable products or using less plastic. Such hands-on investors could also upgrade legacy operations to new standards, creating an eco-friendly growth story to later exit at a higher multiple.

Recent deals suggest this is underway. Logoplaste, a Portuguese maker of rigid-plastic packaging, showcased the green credentials of a business model that cuts CO2 emissions from transportation and reduces secondary packaging, before its acquisition in February by Canada's OTPP.

In an auction last year, Finnish sponsor MB Funds touted paper-packaging company Kotkamills' development of a technology to replace plastics in food containers.

Polythene plan
ESG aside, some mid- and large-cap auctions failed this year. Carlyle called off its sale of Saverglass after advanced discussions with bidder Lone Star, and Polish aluminium group Grupa Kety said it rejected offers for its flexible-packaging unit, Alupol, ending the sale in September.

For other processes in the pipeline, ESG remains in focus. The owners of Italy's Carton Pack, which focuses on the food industry, are likely to face questions about the risk of a French-like ban as they solicit non-binding bids.

3i-owned Weener Plastics' green credentials will surely face scrutiny when its much-anticipated sale begins, possibly in the second half of 2022. 3i is expected to frame stricter sustainability rules as a growth opportunity, thanks to the firm's environmental commitments and innovations in recycling, as reported by Mergermarket.

Sponsors are unlikely to cut ties with the sector just yet, so long as they give their playbook a repackaging.

With analytics by Santosh Shetty

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