Nick Mockett’s speech to the FPA House of Commons Lunch
Nick Mockett, Head of Packaging, Mergers and Acquisitions at Moorgate Capital, recently addressed members of the Foodservice Packaging Association at its annual House of Commons lunch. His assessment gave members renewed confidence in the next ten years and he spelled out why the packaging sector has a bright future
“Let me take you back ten years to 2005. Prince Charles married Camilla Paker Bowles in Windsor Castle, Tony Blair was elected PM for the third consecutive time, a first for the Labour party and a young man called David Cameron was elected leader of the Conservatives. So it’s 2005 and you have £100 in your hand which you are going to invest. You have the choice of 3 indexes to invest in which are, in alphabetical order: 1, the Dow Jones Industrial Average; 2, the FTSE 100; and 3, the Packaging and Containers index. So who would invest in 1, the Dow Jones Industrial Average? And who in 2, the FTSE 100, the leading 100 companies listed on the London Stock Exchange? And who would invest in 3, Packaging and Containers?
e answer may surprise some people. Your 2005 £100, invested in the Dow would now be worth £156. In the FTSE 100 it would only be £112. But, in the packaging index, it would be £205. That’s almost ten times the return of the FTSE 100. Bunzl’s performance, which is a proxy for Food Service Packaging was even better – £100 invested in Bunzl would have turned into £318.
What is not to love about a sector like that? What is driving those returns and making packaging such an attractive sector to invest in?
Well in my mind, there are three areas of attraction: 1, Macro Drivers; 2, Industry Fundamentals: and 3, Micro Factors.
Let’s start with the Macro Drivers. We have a growing population and more importantly a burgeoning middle class. By 2030 there will be three billion more middle class people. Don’t worry, they won’t all be living in Surrey, Harrogate and Wilmslow, but they will mainly be in the Emerging Markets. That middle class demands more food, and protein in particular. That means more packaging in both the production and delivery of the food to the consumer.
The second area of attraction is the Industry Fundamentals. These can be grouped into three fundamentals: to start, there’s the performance through the cycle, as demonstrated by the index performance since 2005. Packaging may now be seen by investors as a defensive sector, like tobacco, drink and pharmaceuticals.
The next industry fundamental is the blue chip customer base. This means that investors in packaging are really buying exposure to the customer, companies like Unilever and Coca-Cola.
The final industry fundamental is that it is asset rich.
Now let’s move on to the third attraction of packaging, the Micro Factors. In addition to the first group (the Macro Drivers like population growth) the micro factors make the industry attractive as they also drive growth. We have trends like more single people living along, working mums, older people, city living, frequent shopping, and, of course, the never ending rise of eating food Away From Home. At my local tube station the entrance arcade used to be full of all sorts of shops from clothing to perfume to shoe repairs. Now it is one mobile phone shop and all the rest are food, mainly ‘on the go’ or takeaway as we used to call it.
Now let’s ask ourselves what the future will look like.
Currently, the industry is too fragmented. The industry is wedged between stronger buyers and suppliers. Think about Michael Porter’s ‘5 Forces’ model. The incentive is there for further mergers and acquisitions and indeed the signs are that the industry seems to be consolidating. 2007 was the peak for global packaging M&A at $32.2bn. But 2014 was $29.9bn and in 2015 we have seen four deals which have a combined value of almost $30bn between them. So we may see a new record this year. Private Equity funds have woken up to those three areas of attraction of the packaging sector. Combine that with the buoyancy of the public markets and it’s easy to argue that this is a sellers’ market.
So, in summary, the future for the packaging industry is bright. We may not see the same financial returns as the last 10 years, but my challenge to the foodservice packaging sector is that we reconvene here in the Houses of Parliament in 10 years and that last decade’s performance of turning £100 into £205 is trounced. For packaging, and foodservice packaging in particular, the future is bright.