Personal fairness’s falling out of affection with plastic packaging By Reuters

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© Reuters. FILE PHOTO: Packages with separated cans can be seen at the Amarsul facility in Seixal, Portugal on July 7, 2020. The photo was taken on July 7, 2020. REUTERS / Rafael Marchante

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From Arno Schütze

FRANKFURT (Reuters) – A decade ago, private equity couldn’t get enough of plastic packaging. They snapped up companies that made bags, films, and trays to contain everything from food and fashion to beverages to drugs.

But now the sector is not quite as fashionable. Many buyout firms have clear control, and some of those who hold assets struggle to outsource them at what they consider attractive prices, according to those involved in such deals.

This reversal shows how much the investment world has recalibrated itself in just a few years, with environmental factors becoming dealmakers or breakers.

“No plastic packaging company would pass our internal ESG check, and we would pass even if such an investment promised a high return,” said Marcus Brennecke, co-head of the private equity advisory team at EQT (NYSE :).

“While we have invested in plastic packaging in the past – we owned Faerch Plast from 2014 to 2017 – we wouldn’t buy a plastic packaging company today.”

These ESG risks – environmental, social and governance risks – include new EU rules to be introduced next year that will require packaging to be reusable or recyclable by 2030.

Private equity investments in the global plastic packaging sector have already slowed in recent years. According to Refinitiv data, the combined transaction value from 2016 to 2020 was USD 1.3 billion, a third below the value of the previous five years.

HUNTING ECO-CHAMPS

However, that does not mean that there is no need to do business.

The plastic packaging market posted global sales of $ 265 billion last year, according to Market Data Forecast. Many investors continue to see the value of packaging goods and are betting on solid growth prospects as no comparable substitute for bulk goods such as food has been found.

But they are chasing the eco winners, which requires a close look at the details.

This week, buyout company Lindsay (NYSE 🙂 Goldberg sold the food and pharmaceutical packaging manufacturer Schur Flexibles to Austrian investor B & C, days after CVC last week sold Swedish company AR Packaging (NYSE 🙂 to US-based Graphic Packaging (NYSE 🙂 had sold.

“We still consider the packaging sector to be extremely attractive,” added Thomas Unger, managing partner at Lindsay Goldberg Europe, adding that the trend towards sustainability has become a decisive factor.

“Companies that score with material efficiency, closed material cycles and an ecological footprint that is as positive as possible will win,” he added. “Companies that fail this challenge lose value dramatically.”

The Partners Group, which was about to sign a purchase agreement for Schur in 2019, did not take part in the tender this time.

“We are very cautious about future investments in plastic packaging companies, partly for ESG reasons,” said Jürgen Diegruber, partner in the Partners Group, whose portfolio company Hoffmann, a caterer, recently switched to plastic paper packaging to improve its ecological footprint.

So what’s the plan?

A plan to make an acquired company “greener” is proving essential, according to deal experts.

The Ontario Teachers’ Pension Plan Board, which in February acquired a majority stake in the Portuguese packaging manufacturer Logoplaste valued at 1.4 billion euros, planned to make all of the company’s packaging reusable or recyclable by 2025 and to increase the recycled content of its products.

Logoplaste even added ESG-linked interest costs to an institutional loan last year, with interest payments tied to CO2 emissions and the use of recycled plastic.

The private equity company SVPGlobal has also overhauled the German packaging manufacturer Kloeckner Pentaplast (kp) since its takeover in 2012.

“The use of recycled materials at kp is roughly three times as high as that of the competition. We helped the company set specific ESG goals and were delighted when kp launched its first ESG loan in the US earlier this year Ratchet binding emitted in the US market. “Said SVPGlobal founder Victor Khosla.

Interest payments related to ESG factors are also provided for this loan.

Investors are likely to consider ESG references in the upcoming auctions.

Information packages have just been sent to potential buyers of the Polish plastic packaging company Alupol, owned by Grupa Kety, and the London-based private equity firm 3i (LON 🙂 is expected to start selling Weener Plastics based in Germany next year.

Grupa Kety and 3i declined to comment on the upcoming auctions.

UNDER ESG MICROSCOPE

An investment banker who worked on a European plastic packaging business earlier this year said environmental factors were under scrutiny.

“Does the target use recycled raw materials, how good is the recyclability of its products, etc.? A low ESG score translates into a low multiple,” he added, referring to a company’s valuation as a multiple of profit.

“While ESG was a marginal issue two to three years ago, this time a lot of work has gone into producing ESG reports.”

Some investors said that even companies in related sectors are affected by the tougher ESG line.

A test of this could come with the sale of the flexographic printing unit from printing ink manufacturer Flint, whose products are used for printing on plastic and paper packaging and which received initial offers from potential buyers earlier this month.

Flint declined to comment.

While there are undoubtedly ways to take advantage of packaging, some investors are unwilling to take the risk.

“Plastic packaging – not for us. Our teams do not like that, they would find it difficult to explain it to our investors,” said the Europe manager of one of the largest US private equity companies.

“And who will buy it five years from now when ESG is likely to be taken much more seriously than it is today.”

($ 1 = 0.8193 euros)

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