clearthoughtIndustrials Insights from Clearwater International 2016

PackagingThe drive towards greater innovation and client preference for global players is leading to rapid consolidation of the sector

Going for growth

The packaging sector remains a huge global industry which continues to see major corporate activity among leading players.

The global volume for packaging units was 3.576 trillion in 20151, by 2018 this figure is expected to reach 4.029 trillion units. The largest global volume areas are flexible packaging, which accounts for 36% of units, paper and board (24%), and rigid plastics (20%). The largest end markets are food (40%), soft drinks (26%) and tobacco (12%).

The current trends in innovation and environmental regulations put great pressure on both ends of the supply chain. This demands large investments by packaging manufacturers in order to innovate and negotiate with powerful manufacturers of raw materials, while at the same time they are having to reduce production batches in response to greater personalisation of products.

The packaging market has historically grown at least at the same rate as the GDP trend in developed countries, and at an even higher rate in emerging nations. It is projected that the global packaging market

will grow at 3.5% per year to 20202, with sales reaching ¤873bn in 2020. More established markets will undergo significant business and demographic changes that will transform value chains in the packaging segment in areas such as glass, metal, rigid and flexible plastics, and board.

Consolidation

Such drivers should also be set against the context of a fragmented industry, especially in sectors such as the rigid plastic and flexible packaging markets. This reflects not only the broad range of print, packaging and labelling solutions which are used in an array of manufacturing and wholesaling industries, but also continuing innovation in packaging which encourages new entrants to the industry. It is essential for packaging manufacturers to have sufficient scale to compete, and to set up subsidiaries across several countries.

Against this backdrop, large trade groups have the cash to continue to buy smaller regional competitors, while the market continues to see plenty of interest from Private Equity in backing opportunities too.

• Consumers favour brands and products with ‘clean-label’ messaging that enhances brand transparency and builds purchasing confidence. The term refers to products that are free from artificial ingredients and are natural or organic. Brand owners, design agencies and packaging manufacturers are increasingly incorporating this messaging into packaging materials;

• The sustainability agenda means weight reduction and the recycling of packaging has become key;

• ‘On the go’ consumption is driving the development of materials which give packaged food a longer shelf life;

• E-commerce is changing packaging needs, driving requirements for versatile and visually appealing packaging solutions; and

• The rise of single-parent family homes, a growing elderly population, and the independence of the millennial generation are all having a huge impact. For instance: an ageing population puts demands on packaging functionality such as how easy the product is to open and re-seal.

A number of significant trends are driving huge change across the industry:

1 Canadean: research, November 20152 Smithers Pira: The Future of Global Packaging to 2020

Industrials Insights from Clearwater International clearthought | 2016

The global market

Europe

Europe is set to experience consistent growth in its packaging market of around 2.1% compound annual growth rate (CAGR) between 2014 and 2018, reaching a total of 1.043 trillion units in 20181. Flexible packaging and rigid plastics dominate the market while the food sector, in particular bakery and cereals, is driving the growth of more flexible packaging.

In recent times, paper and board packaging has seen fluctuations in its growth as a result of changing demand patterns from food and tobacco products. Meanwhile, demand for rigid plastic packs is forecast to reach 292.87 billion units by 2018 with the food sector the largest end-use market.

The UK has performed particularly well in recent years with the food, pharmaceutical, and health and beauty sectors being particularly strong drivers. This is supported by rising consumer spending, which drives demand for added-value packaging solutions and design concepts that offer an alternative to the homogeneity of the mass market.

The Spanish industry saw growth of 2.5% in 2015 as its wider economy revived. This was accompanied by a significant increase in the number and size of investment

projects and consolidation of exports which saw strong growth too. Among the largest exporters were Mivisa Envases, Armando Alvarez, Vidrala and Smurfit Kappa.

The Portuguese market has been growing at a steady rate in recent years, with latest estimates that the industry is now worth more than ¤2.3bn, while exports surpassed ¤730m in 2015. Cardboard packaging accounts for a third of the market and is dominated by foreign players such as Saica, Europac, Seda Group and aforementioned Smurfit Kappa.

Both Germany and France have experienced high volatility in raw material prices but the markets are now showing stronger growth. For instance: the German market was valued at ¤34.8bn2 in 2014, a rise of 2.7%. France remains one of the largest glass manufacturing countries in the EU, while the total market for rigid and flexible plastic packaging stood at ¤11.5bn in 2014 - an increase of 3.1%3.

Americas

Flexible packaging and rigid plastics continue to dominate, accounting for 61% of the total market1. This is being particularly driven by demand from the food market for flexible packaging, followed

by demand for rigid plastics from the food and non-alcoholic drinks sectors. As in Europe, growth for flexible packaging will be driven by the dairy, food, bakery and cereals markets.

Asia-Pacific

The market continues to enjoy strong growth with the number of packs expected to rise by a CAGR of 5.7% over the 2014-18 period1. Paper and board packs are forecast to register a CAGR of 4% between 2014 and 2018, while demand for tobacco products is increasing due to rising smoking levels. China remains the largest paper and board packaging market, while Indonesia is predicting the highest CAGR to 2018 of 4.8%.

As elsewhere in the world, flexible packaging will witness strong growth reaching a total of 682.56 billion packs in 2018. China will remain the main consumer of flexible packaging throughout 2014-18, while India will register the highest CAGR of 8.6% in the same period.

1 Canadean: research, November 20152 Research and Markets: Latest trends and key issues

in the German retail packaging market3 Research and Markets: Latest trends and key issues

in the French retail packaging market

clearthought | 2016 Industrials Insights from Clearwater International

One-stop solutions

As customers increasingly demand ‘one-stop-shop’ packaging solutions, the industry has seen major consolidation as packaging groups develop a complete offering.

A good example is UK company Essentra, a diversified supplier of consumer and industrial products. Prior to its acquisition of Contego Healthcare in 2013, Essentra’s existing packaging solutions in the pharmaceutical and healthcare markets consisted of labels, tear tape and authentication technology capabilities.

However, the Contego deal significantly expanded Essentra’s capabilities with the addition of folding cartons, leaflets, self-adhesive labels and printed foils used in blister packs. The acquisition not only enhanced the range and innovation opportunities offered to existing Contego and Essentra customers, but also provided access to new customers for both companies.

The acquisition of Dakota Packaging expanded Essentra’s presence in Ireland, while the acquisition of the specialist packaging division of Clondalkin Group – a provider of secondary packaging solutions for the pharmaceutical and health & personal care industries - transformed Essentra's position in these end markets and significantly enhanced its geographic presence.

Regulation

The industry is facing increasingly stringent regulations, such as the European Union’s recycling and environmental targets. Such regulations place an emphasis on packaging companies to explore lightweight initiatives while also achieving recycling targets and improved packaging recyclability by using more recycled, bio-based and compostable materials.

For instance: France and Germany aim to achieve a 45% recycling rate in 20201

for all packaging (both household and industrial) and to send zero plastic to landfill by 2025. Energy recovery will continue to play a big part in making this a reality.

Design

Packaging design can play an important role in adding value to products, and companies are acutely aware that they must compete on design while remaining flexible and efficient.

A good example is the food industry, which has seen the successful adoption of stand-up pouches that not only offer greater shelf stability and shelf life, but which can also be produced in a wide variety of sizes and shapes.

1 Asterès: consultancy research2 Creative Bloq: Five biggest packaging design trends

for 2016

Market drivers

A recent report from Creative Bloq2 suggested that packaging design can be just as important in terms of product differentiation as logo design. It highlighted five key themes prevalent in packaging design today:

• Keeping it simple: Text-heavy, bold and straightforward messages quickly communicate the product's benefits or features;

• Use of repeating geometric patterns and shapes: Bold, simple colours and unusual shapes are in vogue;

• Artisan-style packaging works well for brands that want to convey their strong history;

• Packaging that can be re-used within the home after the product has been consumed is a very marketable product differentiator; and

• Consumers want to ensure that products cause the smallest possible impact on the environment. Packaging that reduces the carbon footprint associated with the production, shipping and retail of a product is becoming ever more popular.

Industrials Insights from Clearwater International clearthought | 2016

Market overview

The past year has seen strong demand from both corporates and Private Equity, with M&A seen as an essential route to accessing both new end sectors and geographical markets.

This appetite is reflected in the average deal size across the industry which almost doubled to around ¤148m (£117m) in 2015. This trend is set to continue during 2016 as evidenced by RPC Group’s agreement to acquire British Polythene Industries plc for ¤334m (£261m) which

represents a strategic opportunity for RPC to enter the European polythene films market through an established platform.

Europe is still the most active region, although the Asia-Pacific region is now the second most active location for M&A, accounting for about 28% of all targets and 22% of buyers respectively2. This development marks a massive change compared to 2014, when Asia-Pacific accounted for just 12% of all packaging transactions.

1 Packaging News: The Rise of the Packaging Dealmakers, April 2016

2 Market intelligence and proprietary databases

M&A Analysis

Date Target Country Description Acquirer EBITDA Multiple

Revenue Multiple

2016 Global Closure Systems France Producer of screw caps and bottle tops RPC Group 7.8x 1.1x

2016 PET Sachsen Germany Manufacturer of bottles and containers Logo Verpackungstechnik - -

2016 Tap Telion-Air-Pac Germany Manufacturer of bubble film products Airpack - -

2016 Roba Corrugated Germany Manufacturer of corrugated sheetboard Papierfabrik Palm - -

2016 Mega Airless Germany Provider of airless dispensing systems AptarGroup 11.0x 3.3x

2016 Reno de Medici (Ibérica) Italy Manufacturer of recycled cartonboard Arpafino - -

2016 Fiomo Czech Republic Producer of flexible foils and labels Huhtamaki - 1.3x

2016 Kalenobel Turkey Manufacturer of flexible consumer packaging

Mondi - -

2016 Delta Print & Packaging UK Manufacturer of folding cartons Huhtamaki 12.0x 1.9x

2016 TRM Packaging UK Manufacturer of corrugated packaging DS Smith - -

2015 Envases Gráficos del Segura Spain Manufacturer of cardboard packaging Flexográfica del Mediterráneo

- -

2015 Plasticos Castella Spain Producer of packaging and container injection moulds

Nypro 7.0x 1.4x

Recent European deal highlights

M&A Activity in the Packaging Industry – targets

31%

28%

22%

6%

13%

Europe

Asia & Pacific

US & Canada

LatAm & Carribean

Africa & Middle East

Number of transactions closed globally

60

80

40

20

2010 2011 2012 2013 2014 2015 20160

Q1 Q2 Q3 Q4SOURCE: Market intelligence and proprietary databases

clearthought | 2016 Industrials Insights from Clearwater International

ConclusionThe global packaging industry is rapidly consolidating in response to a number of societal trends as well as the drive towards far greater sustainability and the rise of e-commerce. Both corporate acquirers and PE investors alike see M&A as an obvious route to access new markets, innovations, and geographies.

Against this backdrop, we expect the industry to see more M&A activity as leading global players position themselves in this evolving and fast maturing market.

Cross-border activity

The industry has seen a number of notable cross-border transactions over the past year. For instance, several foreign groups have invested in the Spanish market such as DS Smith, one of the largest European operators in corrugated cardboard, which acquired the corrugated business of

Lantero Group, the sixth largest producer and processor of corrugated cardboard in Spain. In another deal, the Armando Alvarez Group, the main transformer of plastics in Spain, took a majority stake in SPR, a flexible packaging manufacturer based in Texas.

The market has also seen a number of US buyers investing in Europe, such as

ESCO Technologies’ recent acquisition of thermoformed packaging manufacturer Plastique Group Limited.

Corporates from other sectors such as printing have also entered the packaging sector, for example: Canadian print and media firm Transcontinental acquired both Capri Packaging and Ultra Flex.

• US Industrial group Ball Corp’s proposed acquisition of UK rival Rexam for ¤5.6bn will form the world’s largest maker of metal drinks containers. As part the proposed transaction, and in order to satisfy certain regulatory requirements, Ball and Rexam have agreed to sell select metal beverage can assets, support locations and functions in Europe, Brazil and the US to Ardagh Group for ¤3bn (£2.4bn).

• Carlyle Group acquired Saverglass, a French high-end glass packaging manufacturer which produces bottles and carafes.

• Owens-Illinois Inc, the world’s largest maker of glass containers, acquired the food and beverage glass business of Vitro SAB for around ¤1.9bn to extend its reach in Mexico.

• German drugs packaging firm Gerresheimer acquired US plastic vial maker Centor for ¤626m. Centor has more than half the US prescription retail market.

• Apollo Global Management acquired Verallia, from Saint-Gobain, for ¤2.9bn. Verallia is the third largest global producer of glass packaging for the food and beverage markets.

Recent cross-border deals

Date Target Country Description Acquirer EBITDA Multiple

Revenue Multiple

2016 Prado Karton Portugal Paper board packaging company Atena Equity Partners - -

2016 AR Packaging Group Sweden Manufacturer of folding cartons and flexible packaging

CVC Capital Partners - -

2016 Kalle GmbH Germany Manufacturer of food casings Clayton, Dubilier & Rice - 1.6x

2016 Saverglass France Manufacturer of high-end and luxury glass bottles

Carlyle Group - 1.4x

2015 HCP China Cosmetic products packaging group Baring Private Equity Asia - -

2015 Verallia France Glass bottles and jars manufacturer Apollo Global Management 7.4x 1.2x

2015 Weener Plastic Packaging Group

Netherlands Plastic packaging manufacturer for the personal care and food & beverage sectors

3i Group 8.2x 1.3x

2014 Constantia Flexibles Austria Flexible packaging specialist Wendel 9.3x 1.3x

Recent PE transactions

Private Equity

Packaging businesses are attractive investments for PE funds as they have consistent cash flows and are more immune to economic cycles due to being driven by sectors such as food, drink and personal care products. As such

the industry has seen PE investment right across the sector which has had a direct impact on the consolidation of the flexible and rigid packaging industries, especially in Europe. PE is also employing buy-and-build strategies in order to create value. For example: Sun Capital has completed seven acquisitions since 2013 to develop Coveris

into a leading global plastic packaging group with ¤2.3bn sales.

Although the chief focus of PE has been on packaging for consumer goods, there has also been a rise in its exposure to industrial businesses, typified by Clayton Dubilier & Rice’s acquisition of the Mauser Group.

Industrials Insights from Clearwater International clearthought | 2016

www.clearwaterinternational.com

Deal highlightsSome of our recent deals

Meet the team

Supplier of equipment and services to packaging manufacturers in the folding carton, corrugated board and flexible materials industries

Clearwater International advised BOBST on acquiring a majority stake in Shanghai Eternal Machinery

BOBST Group

Packaging supplier to the brewery industry and pharmaceutical companies

Clearwater International advised the management team on the multi-million pound management buyout

Darley Labels

CHINA • DENMARK • FRANCE • GERMANY • IRELAND • PORTUGAL • SPAIN • UK • US

One of the UK's largest independent flexible packaging manufacturers

Clearwater International advised on the ¤16m refinancing of the company

Excelsior Technology

Leading manufacturer of brushes and comprehensive packaging systems for the cosmetics industry

Clearwater International advised 3i Group on the acquisition of a majority stake in GEKA from Halder Beteiligungsberatung

GEKA

Flexible packaging specialists

Clearwater International advised the shareholders and assisted in negotiations for the MBO

Britton Group

Producer of high-tech membrane filtration systems for large international dairies

Clearwater International advised on the sale of the company to Tetra Pak, the world’s largest supplier of processing and packaging solutions to the food industry

DSS Silkeborg

Jon Hustler Partner, UK +44 845 052 0364 jon.hustler@cwicf.com

Simon Zhang Partner, China + 86 21 6341 0699 x 813 zhang.yi@cwicf.com

John Jensen Partner, Denmark + 45 20 33 47 67 john.jensen@cwicf.com

Philippe Croppi Partner, France +33 1 53 89 0503 philippe.croppi@cwicf.com

Markus Otto Partner, Germany +49 611 360 39 24 markus.otto@cwicf.com

John Sheridan Partner, Ireland +353 1 517 58 41 john.sheridan@cwicf.com

Rui Miranda Partner, Portugal + 351 918 766 799 rui.miranda@cwicf.com

Francisco Gómez Partner, Spain + 34 699 446 314 francisco.gomez@cwicf.com