Last year saw a flurry of merger and acquisition (M&A) activity in the pallet industry. Some of the biggest names in the industry changed hands. Private equity continues to gobble up “platform” companies with the hopes of grabbing market share. A driver of consolidation is strong interest from pallet customers in national contracts and service versus dealing with a bunch of local pallet shops.
Huge Deal Will Help PalletOne Get Even Bigger
So, let’s review the recent deals in the pallet sector looking first at what is probably the largest. In December, UFP Industries acquired PalletOne for approximately $232 million plus $18 million for recent capital expenditures. PalletOne is the largest pallet manufacturer in North America with 17 pallet manufacturing facilities in the southern and eastern regions of the country.
In 2019, PalletOne and its affiliates had sales of $525 million and trailing 12-month sales of $672 million through October 2020. The company reported EBITDA of $37 million for 2019 and $44 million for the 12-month period through October 2020. This suggests that the company sold for more than five to six times earnings, depending on how you crunch the numbers.
According to the press statement by UFP Industries, Howe Wallace, the current PalletOne president, will continue to lead the company. This suggests continuity for customers and employees.
“PalletOne is a leader in automation for pallet manufacturing, which we can scale across our existing footprint. They also have exceptional sourcing and design personnel who will help us gain synergies in those areas of the combined businesses,” said Matthew J. Missad, CEO of UFP Industries. “PalletOne brings a strong brand, a new customer base, and operating excellence, which drive us closer to our goal of becoming the preferred global packaging solutions provider and preferred wood preserver in the United States.”
“This is a great opportunity for all of us at PalletOne,” said Howe Wallace. “As a strategic addition to UFP’s leading industrial business unit, we will have access to new markets, value-added industrial products, and resources that will help us grow our business and provide our customers with more value.”
Private Equity Firm Exits Pallets, Sells 48forty Solutions
The second big deal involved Grey Mountain Partners selling 48forty Solutions, formerly CHEP Recycled, for an undisclosed amount to Audax Private Equity. 48forty Solutions is one of the largest pallet recycling and management services companies in North America, with a national network of over 225 facilities, including 44 company-owned and operated plants and more than 180 affiliates.
Jay Mitchell, managing director of Audax Private Equity, stated, “We look forward to partnering with 48forty leadership to support continued growth, both organically as well as through strategic acquisitions. 48forty has developed the platform, infrastructure, systems, and processes to execute on acquisitions.”
These comments do suggest that the new owners plan to invest more resources to grab market share. What does this mean for the market? First it points to continued interest in the pallet sector by the private equity markets. That is a good thing for anyone wanting to sell their operation. It also suggests that private equity is still interested in “platform companies.”
Audax Group takes a “buy and build” approach helping platform companies focus on growth potential.
Kamps Pallets Becomes Platform Company, Sells to Private Equity
The first major deal in 2020 took place in January when Freeman Spogli & Co. bought a majority stake in Kamps Inc., a large recycler and pallet management. Founder and CEO Bernie Kamps stayed on to lead the company and remains a significant shareholder.
Why sell now? Bernie Kamps explained, “The primary reason I am selling majority interest in my company is I needed a liquidity event to give away much of my earnings in my lifetime.” Kamps knew he needed to find private equity to invest in the business or a company to buy the business out right.
Kamps added, “The new majority owners looked at our 5-7-year plan and liked the direction we wanted to go… Our management team is staying in place and will run day-to-day operations.”
With some more lucrative and innovative sectors in the U.S. economy, why is the pallet industry attracting some interest from private equity firms? Kamps suggested, “I think that private equity firms see that the pallet sector is a non-consolidated industry, and it provides them another way to diversify their portfolio.”
Freeman Spogli is committed to help Kamps grow. This might include some more strategic acquisitions in the future. Kamps commented, “Further acquisitions would be in the pallet recycling sector in the right geographic areas to build out our network. We look for companies with a strong management team and talented people as well as a customer base that fits well what we do.”
Pritzker Group Sells PECO Pallet, America’s 2nd Largest Rental Company
The last big deal to point out was the sale of PECO Pallet Inc., a large North American pallet rental company, to Alinda Capital Partners and Universities Superannuation Scheme (USS). PECO, known for its distinctive red pallets, currently operates a North American pallet pool network encompassing more than 80 facilities and 21 million pallets. Much smaller than its main rival, CHEP USA, PECO has developed a slightly different model when it comes to asset management and billing. PECO is positioned to grow if the new owners are willing to invest in gaining market share and adding to the size of its pool. The company has been owned by the Pritzker Group since 2011.
The new owners have much larger pockets than the previous owners, but this is no guarantee that money will come flooding in for growth. PECO stated when asked how the new owners will affect funding, “Alinda and USS are committed to supporting PECO’s established strategy, which emphasizes providing consistent, reliable pallet pool services to those customers that recognize PECO’s value proposition, quality and superior performance. Under Alinda and USS, PECO will continue to invest in its pallet pool, to enhance the customer value proposition and grow the business.”
This suggests that the new owners are willing to invest in growth. However, it will take a significant financial investment to grab market share.
Long-term Trends and Where Does M&A Activity Go from Here?
Was 2020 just a good year for transactions or is this a sign of more industry consolidation?
Steve Miller, the co-president of Millwood Inc., has a unique position running one of the largest pallet companies in the country. Miller suggested, “I think the venture capital (VC) guys look at the pallet sector as a rock-solid investment. It’s not sexy. It’s not going to make you double digit returns, but you can take it to the bank… It’s sort of like a real estate investment trust.”
Some of the recent deals have caught Miller a bit by surprise. He said, “The PalletOne deal. That’s amazing. They received a very impressive multiple. I’m very happy for Howe and his team. Howe has done an impressive job leading the company, and it was a good choice leaving him in place to lead the company into the future.”
Miller doesn’t believe the recent transactions point to a big move for consolidation or a flood of money from outside the industry. He stated, “I think this is just part of the normal cycle of business as generations come and go. The industry is so diverse now; there are companies in all of these business stages… I don’t think that there’s going to be drastic change in the types of ownership or roll-ups. That’s never going to happen in the pallet industry,”
Miller asked, “You’ve been around a long time and you certainly have history to look back at how many VCs ever left the pallet industry and were high fiving on the way out with a big payout. I don’t know of any. There are a lot of investors who have jumped in. And then a few years later, they jump out.”
Honestly, Miller is right. One of the first industry roll-up efforts was PalEx that later became PalletOne and IFCO Systems (today 48forty Solutions). Those two companies are around and doing strong. But they haven’t gobbled up most of the market. The most successful company in that regards has been CHEP, which pioneered a different model. Actually, it took almost two decades for many of the owners and investors in PalletOne to get a payout.
Wallace confirmed, “It’s just been a long haul. There were a lot of guys who reinvested their wealth in the business. And none of them had ever gotten a return…We had a number of people get a payday with this acquisition, and that’s a good thing.”
Wallace also agreed that he didn’t know if recent transactions are a sign of any major consolidation trend. He did suggest that private equity may continue to have interest in pallets, particularly in the recycle side. He explained, “Recycling is not as capital intensive as pallet manufacturing. It can produce good margins without having to buy plants and factories. It’s a really good story too from the standpoint of recovering pallets, reducing carbon footprints, helping with customer sustainability requirements. Recycling checks a lot of boxes that private equity is interested in.”
Wallace added, “Recycling can be thought of as a logistics and services business, which may attract more attention than wood lumber manufacturing.”
Kamps agreed about the attractiveness of the recycling market. He said, “I think there is a lot of interest from private equity in the pallet sector, especially the recycling side. There are some pretty good margins for the amount of capital that you have to deploy.”
Look at the consolidation trend, Kamps is more bullish on this market movement. He commented, “I predicted last spring at the annual pallet meeting that consolidation is here and will continue, especially in the recycled pallet market. It’s not just because of the Baby Boomers retiring either although that is a driver. We have bought some pallet companies with owners who were in their 40s. They saw the consolidation trend happening and wanted to sell when the recycling market had good profitability. They also want to connect with the right partner who is poised for growth and investment. Some want to manage multiple sites and others would just like a liquidity event.”
Kamps suggested, “Margins have been good in the recycling industry for the last three to four years. So, they’re probably selling at a high point. And if they wait and recession hits, the value of their company could go down, and they miss the opportunity to ride the wave.”
While 2020 was quite a year for M&A activity, there will be more deals in the future. These transactions may not be as big as some of those completed last year. Some could be even bigger. What we did learn from 2020 is that pallets are a critical part of the U.S. economy and supply chain. While pallets are not edgy, they are stable. And good companies will always find a buyer even though the multiples may not reach the heights that owners desire.
