Perfect storm of factors create ideal conditions for M&A deals

Richard Stuart-Turner
Wednesday, August 31, 2022

Barely a day has gone by in recent months without reports emerging of yet another industry acquisition or merger.

Printers and suppliers of all shapes and sizes from across the entire print and packaging sector have been buying, selling up, or joining forces, partly as a reaction to the current unique set of circumstances encompassing the pandemic, Brexit, the Russian invasion of Ukraine, an impending change of Prime Minister, rising inflation and interest rates, and supply chain challenges.

Compass Business Finance director Jamie Nelson believes it is this uncertainty that is creating more M&A opportunities, at least in the UK print industry.

“Business owners are making decisions about whether they want to carry on at this moment in time. They’re thinking ‘is my business back to where it needs to be post-pandemic, [or] will I get it back’ and ‘I’ve taken on extra debt to see us through this period’.

“Companies that have taken on CBILS facilities and RLS facilities have got more debt, there’s no certainty going forward, we’ve got inflationary rises, Ukraine, and we’re coming off the back of the pandemic. The world is a different place so they think ‘is my market going to be there as it was before, will it be the same, what age am I and do I want to go again at this stage, and is there an exit route?’.

“Certainly when there’s uncertainty in any market it drives opportunity, and that’s where M&A comes from. People that are looking for mergers and acquisitions and looking for opportunities like a disrupted market.

“For any business person looking at their future, if there’s a good opportunity to exit that makes sense, and you’re not sure where the business is going and if it’s going to be where you wanted and originally planned it to be, then you may well think about an exit when you might not have otherwise done so.”

A recent Printweek poll that asked ‘What is your long-term exit strategy?’ found that while over a third (39%) of business owners have no plan at present, the majority do have a succession plan in mind, with 35% planning a sale to an external buyer, 14% looking to hand the reins to a relative, and the remaining 12% planning to sell to an MBO team (see page 30 for part one of our MBO feature).

M&A has been a print trend for a long time, particularly in recent years as the industry has continued to consolidate.

Successfully acquiring or merging with another company can be an effective way to quickly gain a foothold in a new market, increase visibility in an existing sector, reduce expenses and overheads, move into a new territory geographically, boost turnover, or – in some cases – even take out a competitor.

In recent years many industry deals have been made due to rising consumer demand for sustainable products; it is perhaps easier to acquire know-how, expertise, and intellectual property in this area than to start from scratch.

Others have been a result of Brexit, with many international companies keen to gain a foothold in the UK to avoid some of the supply chain complexities and shipping issues they may face without a local base.

Notable manufacturer and supplier deals of the last few weeks have included Koenig & Bauer’s purchase of Celmacch Group, Denmaur Independent Papers’ acquisition of the business and assets of the Fine Paper and Conversion division from Middleton Paper Company, and Plockmatic Group’s purchase of post-press equipment manufacturer Intec Printing Solutions.

Other major names including HP, Canon, and Xerox have also been snapping up other businesses in recent months, the latter acquiring Go Inspire in July as it looks to expand its Digital Services business worldwide.

Plenty of printers have been making deals too; among numerous others Manchester Printers Group (MPG) bought its fourth print business in four months in July, with its purchase of Deanprint. The similarly acquisitive PFI Group has purchased Works Manchester, Speedscreen, and Gardners in the last few weeks, while NPS Print and Strategic Print merged in July to become NPS Ltd.

The deals involving UK businesses will eventually feed into the statistics released regularly by the Office for National Statistics, whose data for mergers and acquisitions involving UK companies from January to March 2022 actually reported a significant slowdown in deals compared to a year earlier.

371 M&A transactions were completed in the period compared to 610 in Q1 2021. The fall was attributed to the pandemic.

Reuters, meanwhile, reported in June that, on a global level, deal-making is entering “an arid season” as “raging inflation and a stock market rout curb the appetite of many corporate boards to expand through acquisitions”.

It attributed the drop in deals to the Russian invasion of Ukraine and fears that an economic recession is on the way.

Marcus Clifford, regional director for the eastern region at the BPIF, says: “The outlook for 2022 and beyond has become more complicated. Notwithstanding new, profound questions about geopolitical stability, and ongoing headwinds and tailwinds established earlier remain powerful negative forces.”

Nicholas Mockett, head of packaging M&A at Moorgate Capital, adds: “We have seen buyers put M&A in Central and Eastern Europe on hold since February. Not necessarily because they were expecting Russia to invade neighbouring countries, but the situation causes uncertainty.

“For example, Russia is a major player in raw materials such as wood, pulp, and plastics. The impact on supply chains has muted M&A appetite in general.

“Acquirers are less able to predict their own cashflows (to use to fund mergers and acquisitions), let alone the cashflows of an acquisition target. Also, the Black Sea is often used to ship goods and moving to road freight may increase costs or time delays.

“With rising inflation, such as energy costs, there is evidence of consumers reining in discretionary spending, such as Netflix subscriptions, and this may also mean some print categories falter too.”

Russia itself has seen a flurry of M&A activity, partly because many multinational companies have looked to sell any stake they have in the country. Mondi, Stora Enso, Sylvamo, and Smurfit Kappa Group are among the industry names to have sold their Russian operations in recent months.

Packaging was one of the industry’s key performers during the pandemic and is likely to remain a buoyant M&A target with plenty of room yet left to grow, partly due to the innovation happening in sustainable packaging, as well as advances in inkjet technology that are assisting new entrants.

Packaging has also attracted a lot of interest from private equity companies in the past few years.

“On the whole, people don’t stop eating, drinking and brushing their teeth even in a recession so printed packaging volumes should perform relatively well,” Mockett says.

“Many parts of the printing industry, including printed packaging fared well following the Covid pandemic lockdowns. Consumers, including those stuck at home with 80% of their income coming in and no work to do, shifted their attention to online shopping, which drove packaging volumes.

“Also, the shift in food consumption from restaurants to at-home dining tends to drive packaging volumes. So, when investors are looking to deploy capital, particularly in light of recessionary headwinds, printed packaging looks like a robust sector.”

While there are clearly opportunities out there for those with acquisitive ambitions, financing a deal in the current climate is the next hurdle to overcome.

Martin McTague, national chair of the Federation of Small Businesses (FSB), says: “Without cash or shares to make an offer, a business looking to make an acquisition will have to look to debt to finance the move.

“However, recent FSB research found that approvals of small firms’ finance applications (for any business reason, not just M&A) are at a record low of 43%, while only 9% of small businesses applied for finance in the first quarter of this year.”

Nelson adds: “Traditionally speaking, when you do M&A, you need a business that’s not too leveraged for a start, so the obvious routes are looking to use the equity and assets within the business. So you could refinance assets, you could use invoice finance to leverage off a debtor book, and you can use term loans if you can get access to them, although they aren’t necessarily easy to access.

“Outside of that you have to start looking at private equity, and that can be difficult to secure if it’s a more leveraged business, unless you’ve got the assets within your own business to leverage off of, or you’ve got a private equity firm who have got the capital to put forward.

“Over the course of the pandemic, businesses have taken on debt, and we’re finding that some of them are reasonably leveraged, which makes it challenging to then raise the funds at this point in time, which is another reason why private equity has become more involved.”

Among the industry deals completed over the last few months are the first M&A transactions ever made by some businesses. With many others perhaps currently considering their maiden acquisition, the M&A experts all agree that prospective first-time buyers should tread with caution, and do their homework.

“Having a clear strategic reason to merge or acquire another business is of fundamental importance to the combined business’s subsequent success,” says McTague.

“Making sure the merging businesses are a good fit – culturally, geographically, in terms of product or service – is always a smart idea, but not having a definite idea of where you want to go with the final combined business will undermine all your hard work.

“Communication is also key – to staff, customers, suppliers, and the wider sector you operate in. Make sure you undertake a very robust due diligence process, covering all relevant regulatory, financial, and legal risks, and it will be more than worth the time and cost, as many M&A projects are undone by a lack of proper due diligence.”

Clifford agrees that commercial due diligence is key: “The ability to keep customers and the strength of customer relationship is the most difficult thing to establish and control. Without this surety, modelling financials is just an exercise in conjecture.”

The outlook for M&A in print is perhaps – like everything else currently – hard to predict. Mockett warns that in packaging and print “anything that has got an element of discretionary spend to it is likely to be of less interest to an acquirer [and] if the consumer isn’t spending on that type of product, there just isn’t going to be cashflow”.

But Nelson believes the uncertainty could actually drive more M&A activity. 

“I don’t think we’re going to see M&A die off in the short-term until we reach the point of some sort of ‘business as usual’, whatever that is. There’s going to be opportunities, and when there are opportunities in any market, there’s going to be people looking without a shadow of a doubt,” he concludes. 


Acquisitive growth makes sense, but requires care

Paul Holohan, CEO, Richmond Capital Partners

The combined challenges of Covid and Brexit have ensured all business owners have considered their futures. Some have decided to call it a day whereas the majority have planned for post-Covid/Brexit and are seeking growth. As organic growth is difficult, acquisitive growth makes sense especially as valuations are realistic and M&A activity therefore continues to gather pace. Possibly contrary to expectation, funding is available for acquisitions as banks have substantial cash reserves while spending has been curtailed.

Acquisitions are however complex and there are many pitfalls to trip up those inexperienced in buying a business. So here are a few caveats. Do check out the customer base – reliance on one or two big customers leaves a company vulnerable. Seek a strong second tier of management so that losing the owner does not cause an issue for customers. Beware of capex commitments or needs – if plant is old, considerable investment is likely to be needed to remain competitive.

Are there large existing financing agreements, hire purchase, for example, to continue funding and are they relevant to the future plans? Too much debt is a definite danger sign. Assess future prospects together with the markets served to be sure the business has a strong offering to healthy markets and a good customer base in these sectors. If buying, keep to your business plan and implement it. Finally, and possibly the most important factor, divergent cultures between the existing and new companies can be a classic problem and can severely harm smooth transition of ownership and therefore success.

Acquiring a business is a major decision. It needs to meet the aims of the acquirer’s growth strategy. Check everything out thoroughly and don’t be afraid to walk away if there are doubts. Last, but not least, get the help of an industry adviser and use their advice and experience to make things happen and give yourself the best possible chance of success.


What has M&A brought to your business?

Stephen Docherty, chairman, Bell & Bain

“Most of the deals I’ve done have been to help people and keep people in jobs. [2019 buy] J Thomson has been a really great addition; it’s helped us grow and gave us help when we needed it. During the pandemic they took a lot of overspill, and I knew I could rely on the quality, I didn’t have to send it to somebody and worry about whether they would do it correctly. The aim was to help me meet my growth and help this company with its growth, and we both remain very busy now.”

Liz Smith, managing director, LG Davis

“In the last 60 years we have not only expanded our customer base but introduced new skills, increased machine capacity, and expanded our product range through strategic acquisitions. It’s enabled us to develop and grow our team as well as our business and we are always on the lookout for additional opportunities. I would certainly recommend merging as a growth strategy but do your homework. It is not a quick fix and needs careful consideration to make it work.”

Jim Kerr, CEO, Astra Group 

“The merger of Astra Signs and ADXBA, and subsequent launch of Astra Group under which both businesses now sit, has seen us create a totally unique, end-to-end offer. The level of combined digital and traditional signage expertise we are proud to offer clients, along with our unrivalled technological capability and national and international reach, has positioned Astra Group at the forefront of the market. We set out to open the door to increased opportunities and provide the group with increased stability and that is what we have achieved.”

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