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Gordon Carson finds that M&A activity in the labels sector is a result of its central position in the supply chain.

The labels sector has witnessed a surge in mergers and acquisitions in recent months. Industry powerhouses including Clondalkin and Paragon Print & Packaging have led the way with major purchases, and smaller players have been equally keen to strengthen their market position.

This burst of activity has not, however, surprised Nicholas Mockett, a partner at Moorgate Capital, which advises on packaging industry deals. He says the labels industry is particularly attractive to suitors due to its structure and its vital position in the packaging supply chain.

“Labels are a critical aspect of the supply chain yet a relatively small cost component,” says Mockett. “If you have a product and it has a label on it, it’s a relatively easy way to change the information you are putting out.”

The problem for many label producers, though, is that they are stuck between a series of massive rocks (what Mockett describes as the “oligopoly” of materials suppliers) and equally large boulders (in the shape of retail and FMCG customers) – and both have the power to exert massive forces on their margins.

Packaging News has frequently highlighted price increases from the likes of M-real and Ahlstrom over the past couple of years, and label producers expect to see further price rises in the next year.

“Raw material prices are going up by 10%-plus, which is very worrying,” says John Watson, chairman of Glasgow-based John Watson & Company. He points out that the UK no longer has the mill infrastructure to supply domestic label companies, meaning they are more at the mercy of overseas suppliers and exchange rate fluctuations.

“We just have to pay the piper,” he adds. “Printers have to become bigger. Our margins are constantly under pressure and our customers are very keen on price too.”

With supply-side pressures not likely to disappear any time soon, Mockett says label converters “should probably be looking to grow market share so they can stand toe to toe” with materials producers.

“The bigger you are, the more likely you are to have a man-to-man conversation rather than master and servant,” he adds.

Besides the basic economic rationale for increasing a business’s punching power with suppliers and customers, there may be other significant factors driving labels M&A activity. Clondalkin’s acquisition in February of Catalent Pharma Solutions’ Printed Components business added four sites – in Ireland, the US and Puerto Rico – and $100m (£75m) of turnover at a stroke.

However, the Irish group also expanded its foothold in a very global marketplace, labelling for pharmaceutical and healthcare products, where it already had 14 production sites in Europe and North America. The deal also provided an opportunity for Clondalkin to strengthen its relationship with Catalent, by signing a long-term deal to supply the firm with the acquired sites’ products.

Meanwhile, Paragon Print & Packaging’s swoop for Skanem’s Gateshead business in the same month was driven by more local concerns – Paragon’s ambition to bolster its presence in labelling for UK food manufacturing and food retailing.

Mockett, who believes Paragon could be a key player in further consolidation of the UK self-adhesive label market, points out that most food is domestically produced and consumed, meaning domestic label supply will be dominant in this arena. However, he adds: “If you are providing labels for shampoo for someone like P&G, they would probably quite like you to have operations in different countries.”


Global growth

At the global level, the major labels player continues to be Canada-based CCL, whose UK operations include Decorative Sleeves, acquired in 2007. The CDN$1.2bn-turnover (£750m) group continues to grow globally, and so far this year has bought a Chicago labelling company and invested in a labelling joint venture for the Middle East and India.

But Mockett also tips Spear, the US-based group which has operations in Cwmbran, as another future consolidator, particularly in filmic labels for beer bottles. In 2008, Spear bought the Tennessee-based printing operation of Anheuser-Busch, the Budweiser brewer, and it now has six facilities – four in the US and one in South Africa, as well as the plant in South Wales.

Buying – or being bought by – a competitor is not the only way for label companies to expand their presence. One smaller player Leicster-based Label Apeel, which supplies self-adhesive labels to the food and drink sectors, is aiming to prove it can work with larger customers by increasing its business from mainland Europe.

“If we want to work with larger brands we need to show the ability to operate in Europe as well,” says Stuart Kellock, managing director of the £4m-turnover business. “A lot of manufacturing for brands is moving to Poland and the Czech Republic and there’s an expectation that we could supply and deliver there too.”

The company has already broken into the German beverage labelling market with two deals, to supply bottle labels to Weingut Herbert Becker, a vineyard in the Kraichgau wine region, and Mall-Bräu, a brewery in Meckesheim.

“We are looking to have sales people out there and maybe in three to four years putting some plant out there too,” says Kellock. “When we are tendering, one of the big questions is whether we have a presence in Europe.”

While Label Apeel has an eye to European expansion, the firm is continuing to invest in its UK plant, spending £700,000 on a new HP Indigo WS6000 digital label press earlier this year. Kellock says it’s important for label producers to broaden their offering to include design and R&D for customers.

Another firm investing heavily in its plant is CS Labels, the self-adhesive label producer based in Willenhall in the West Midlands. Last December the company bought its fourth Xeikon digital press in four years, a 3030 model, and managing director Simon Smith says digital work accounts for 80% of its turnover of around £1.8m.

The firm’s digital capability has also enabled it to win back work previously lost to a Chinese competitor, and Smith says digital is becoming more popular as customers demand increasingly quick turnarounds (examples pictured above).

John Watson & Company has also been investing in new technology, and last December took delivery of a 10-colour Gallus RCS 330 press at its Glasgow site. Chairman John Watson says the firm’s label production is split roughly 50-50 between self-adhesive and pressure-sensitive – compared with a 70-30 division only two years ago – as customers increasingly prefer the faster speed of applying pressure-sensitive labels on bottling lines.

While future consolidation led by industry giants will no doubt affect some UK label producers, it’s not the only fate awaiting, or option available for, smaller firms looking to survive and prosper.


700m
The amount of self-adhesive labelstock in m² used in the UK each year

£100m
Turnover of Paragon Print & Packaging’s label business in 2010 (out of total group sales of £146m)

10%
The typical increase in labelstock prices in the past year

25bn
The number of labels that can be produced annually at Spear’s plant in South Wales