The Message on the Label: 'Seize the Opportunity to Sell'
No one in the label business needs to be reminded that for a string of years now, business has been great indeed.
We saw some label producers achieve year-over-year growth up to 20% during the long siege of COVID-19, while many other print market segments suffered. At the same time, earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed substantially for the most successful label providers. Most of the rest are also doing relatively well in terms of valuation as the label market’s rising tide gives everyone’s numbers a boost.
M&A investors have noticed these trends, and they’re not hesitating to act on the opportunities they see. This is particularly true of private equity (PE) players, who view the label printing market as closer to recession-proof than any other segment of the printing industry.
Right now, we’re tracking about six PE firms rolling up label companies at a rate similar to CGX’s and Cenveo’s in their heydays as commercial print consolidators. One of them has built a platform of no fewer than 17 label producers. They’re all being aggressive in their valuations when competing for the premium providers.
It’s not hard to explain the allure of label companies to PE firms and similar financial buyers, and to other label companies seeking to acquire strategically.
Distinction Without a Difference
The label segment’s most fundamental advantage is that it’s part of packaging, which has always been regarded as a premium business. In years past, the package per se was a more appealing investment to buyers than the label on that package. But today there’s little if any gap at all between how each type of business is perceived as a candidate for acquisition. A printing firm may specialize in one or the other, but for buyers, the valuations will
The most important similarity is the fact that the label business, like packaging in general, isn’t as susceptible to economic swings and exogenous shocks compared to other sectors of the economy. To investors, that spells a safe haven for their capital in a segment protected against trends that hinder growth elsewhere.
Investors know that labels for food and other consumer staples are always in demand. They see stability and growth ahead for label providers serving specialty markets, such as medical devices, pharmaceuticals, and shipping and packaging. Any issue of this publication tells them why high-end prime labels, clear labels, and shrink sleeves are now must-have vehicles for branding an almost limitless range of consumer products.
Something else that attracts M&A investors is the strong forward momentum of the label market, which isn’t showing any signs of abating. This is true despite the fact that over the last several months, many companies experienced slowdowns in revenue because of the pandemic’s aftereffects on the label supply chain.
When Enough Is Too Much
This happened to these companies because once the pandemic started to take hold, many of their customers switched their buying philosophy from just-in-time to just-in-case to have enough labels on hand. A label user we know talks about how his inventory soared to $3 million — approximately twice what he normally carries. As customers like this work their way through the oversupplies they have accumulated, the volume of new orders will decrease accordingly.
But this is a temporary blip at most. When the backlogs are gone, and the inventories have returned to normal levels, business will rebound to normal as well. That is why we see no reason to think the label segment’s strong pace of growth will slacken in the next few years.
In fact, there probably never has been a better moment to sell a label company than right now. Owners with long-term intentions to sell should consider shortening the time frame — current market conditions for sellers are just that good.
Everyone Can Play
As in any other business, larger label firms will be inherently more attractive to acquirers than smaller ones. Profit margins and EBITDA tend to increase with growth in sales volume. The scale and critical mass of a big label producer make it likelier to serve premium customers in diversified markets.
However, size isn’t the only criterion. Nearly every label company is better off today than it was just a few years ago, and thus more eligible for sale. In the eyes of buyers, a stable, well-run label provider of nearly any size will be a solid candidate for acquisition — either as a financial investment within a PE platform, or as a strategic addition to another label company.
Labels are everywhere, and they’re indispensable to our lives as consumers. They do more than we sometimes appreciate to keep us connected with the brands we trust and the products we rely on. Small wonder that astute investors want to capitalize on the opportunities they see in the print industry segment that produces them.