Demands from consumers, government could heat up plastics recycling M&A – Analysis
13 March 2020
- Financial investors have traditionally been wary of the space
- Consumer demand and government regulations are driving large corporations to pursue sustainability policies
- Global plastics producers are acquiring in the space to meet those ESG commitments
A combination of government regulations and consumer pushback against single-use plastic, could bring investors off the sidelines into plastics recycling, sources say.
“We are in the middle of a shift right now,” said Martin Aares, who co-heads the private equity platform of sustainability-focused New York private equity and venture house Closed Loop Partners.
Low prices for virgin plastic and a glut of recycled materials in the US has kept investors generally wary of the plastics recycling space. Institutional investors, especially those with an interest in ESG, are slowly moving from commitments to actual investments in recycling. “We believe we are at the bottom in terms of commodities pricing.”
Manufacturers traditionally using virgin plastic are starting to acquire processors of recycled plastic – companies making PET (polyethylene terephthalate) pellets for the packaging and bottling industries – in order to have a broader product portfolio, Aares said.
The need for consistent demand
There hasn’t been much M&A activity in plastics recycling historically, particularly in the middle market, industry sources said. Andrew Munson, a partner at MBS Advisors serving mid-size plastic compound manufacturers (typically USD 10m to USD 30m revenue), said his firm did 10 deals in 2019, only one of them in recycling, when Houston, Texas-based TrueGrid, a company using post-consumer polyethylene to make permeable pavement, was acquired by Airlite Plastics of Omaha, Nebraska.
For the M&A market to heat up, the recycling industry needs to be consistent as well as profitable, Munson said from the floor of the Plastics Recycling Conference in Nashville, Tennessee.
“We think there will be increasing investor interest in recycling in the coming years due to the pressure governments, whether they’re local state or federal, are putting on OEMs [original equipment manufacturers] not to use single-use plastics or to use more recycled content,” Munson said.
There are generally no incentives other than cost for large companies to use recycled content in their products, Munson said. Because prices for virgin commodity resin are volatile, the recycling industry rides a “boom or bust” cycle that busts when virgin plastic is cheap.
The price of recycled plastic dropping too low because of a lack of robust and uniform domestic processing infrastructure is also a problem driving volatility in the space. When China announced it would significantly tighten standards for plastic waste imports, the US recycling industry was flung into uncertainty as a commodities glut developed and prices dropped.
Regulation compelling the use of recycled plastic is high on the mind of several mid-sized companies in the space, some of which argue that it would help make plastic recycling more profitable.
“Some regulation would be helpful,” said Ed Traylor, president of Fort Payne, Alabama-based Jet Polymer Recycling. In the meantime, the glut of recycled material in the market has made sales difficult, he said. “There’s just too much of it out there.”
If regulation or changing consumer preferences can create a more steady, predictable demand for recycled material, small and mid-sized recycling companies will become more profitable and attractive targets for large strategic acquirers, Munson said.
“I think it will affect M&A to the extent that the plastic recycling industry can become more stable and more viable from a private standpoint,” Munson said. “When you have plastic recyclers going out of business every time there’s a drop in resin prices … that doesn’t attract investor interest.”
High interest, with money on the sidelines
Today investor interest is high, but the number of investors putting their money into plastics recycling is low, multiple sources involved with private equity agreed.
M&A may be further complicated by the spread of COVID-19 by increasing scrutiny on due diligence, particularly for deals with supply pipelines leading to Asia, sources say. But that same type of scrutiny has been present for more than two years as the U.S. has engaged in tariff skirmishes with China and has not impeded the progress of active deals. Whether the virus will forestall future deals remains to be seen, they said.
“[COVID-19] demonstrates the risks associated with today’s interconnected, global supply chains,” Aares said. “Building domestic recycling infrastructure and local material processing capacity helps mitigate these risks.” Aares previously said the recycling industry is “recession resistant” because a downturn in the economy does not dramatically impact the amount of waste produced.
Dylan de Thomas, vice president of industry collaboration for The Recycling Partnership, said he’s being contacted frequently by investment firms questioning him about the industry he represents. They are noting the “promises” large corporations, particularly beverage companies, are making to use more recycled content.
What prospective investors should realize, de Thomas said, is companies like PepsiCo and The Coca Cola Company need a consistent supply of bottles and packaging manufactured from recycled material to meet those promises – something they have not yet been able to secure.
Coca Cola, having failed attempting to vertically integrate its own recycling operation in the past, has a stated goal of having all its plastic bottles be made from 50% recycled material by 2030. Another example is the McDonald’s Corporation, which is trying to remove the plastic liner from “the ubiquitous paper cup” to make it truly recyclable or compostable, Aares said.
Companies like global plastics producers Indorama and DAK Americas, which supply bottles and other packaging to large beverage companies, are investing in the space to build large recycling operations to fill those needs, de Thomas noted.
In 2019, Thailand-based Indorama, which is the largest virgin plastic producer in the world, purchased reclaimer Alabama-based Custom Polymers PET in a deal financial filings show was worth USD 30m.
In January 2019, DAK Americas bought Richmond, Indiana-based Perpetual Recycling Solutions. A financial filing from subsidiary Alpek shows the company paid USD 44.9m on the deal, including the build-out of a cogeneration power plant at a facility in Mexico.
In April, a report from Closed Loop Partners found a potential addressable market of USD 120bn for recycled plastics in the U.S. and Canada.
In the U.S. and Canada, recycling infrastructure recovers less than 10% of post-consumer plastics and supply of recycled plastics meets just 6% of real demand, the report states, going on to identify 60 companies developing technology solutions to sorting recycled plastic.
Steve Alexander, president of the Association of Plastic Recyclers, said he has been contacted by more prospective investors in the last 18 months than the previous 15 years combined.
“There’s a lot of money on the side,” he said. The question is: “What’s going to be working sustainably by 2040? 2050?”
Selection of deals in the Plastics Recycling market – 2019
| Announced Date | Target | Bidder | Buy Side Advisor | Seller | Sell Side Advisor | Deal Value |
|---|---|---|---|---|---|---|
| 29-Oct-19 |
Lotte Chemical UK Limited (United Kingdom) |
Alpek SAB de CV (Mexico) |
LA: Freshfields Bruckhaus Deringer |
Lotte Chemical Corporation (South Korea) |
FA: Standard Chartered PlcLA: Allen & Overy; Lee & Ko | 90 |
| 09-Jan-19 |
Perpetual Recycling Solutions, LLC (USA) |
DAK Americas LLC (Mexico) |
Sorema Plastic Recycling Systems (Italy) |
FA: Mesirow Financial Holdings | undisclosed | |
| 03-Aug-19 |
Menzel Diversified Enterprises LLC (USA) |
Airlite Plastics Co (USA) |
undisclosed | |||
| 19-Apr-19 |
Stiles Manufacturing LLC (USA) |
Airlite Plastics Co (USA) |
undisclosed | |||
| 03-Oct-19 |
Balcones Resources Inc (USA) |
Closed Loop Partners LLC (USA) |
undisclosed | |||
| 04-Dec-19 |
Green Fiber International Inc (USA) |
Indorama Ventures Public Company Limited (Thailand) |
FA: Lincoln International | undisclosed | ||
| 30-Jul-19 |
Sinterama SpA (Italy) |
Indorama Netherlands BV (Netherlands) |
LA: Allen & Overy |
DeA Capital Alternative Funds SGR SpA (Italy) |
FA: Leonardo & Co LA: Orrick Herrington & Sutcliffe | undisclosed |
by Onofrio Castiglia in Charlottesville, Virginia with analytics by Philip Segal in New York.
