Industry Consolidation Insights & Outlook

Industry Consolidation Insights & Outlook

Consolidation Outlook: After a steady year of mergers and acquisitions activity, what does the future hold? How are the dynamics changing? What are the strategic differences between the players?

By Chaille Brindley
Date Posted: 1/1/2023

Will M&A Activity Continue in 2023?
The consolidation trend this time has been driven by significant interest from private equity funds. Pallets are predictable, fairly constant, and a nice product to diversify a portfolio.

Over the last two years, the amount of merger and acquisition (M&A) activity in the pallet industry has reached unprecedented levels. This trend has occurred thanks to the influx of private equity investors. The two biggest names in this revolution are 48forty Solutions and Kamps, Inc. Two other players are also making some big moves, including PLA (formerly Pallet Logistics of America) and Millwood, Inc. Let’s look at some of the lessons from the last two years of M&A activity and ponder what may happen in the near future.

How This Time Is Different

There have been a few efforts in the past to roll up part of the industry and develop national companies. Most notably, this occurred with PalEx and IFCO. Those companies are still around in some form. PalEx later became PalletOne. And IFCO morphed into what later became 48forty Solutions after having a number of owners. None of these companies were ever able to go public. While they grew to become massive players, they were still far from dominant nationwide.

The consolidation trend this time has been driven by significant interest from private equity funds. Pallets are not sexy. But they are predictable, fairly constant, and a nice product to help diversify a portfolio. This time, there are at least two major players, with a couple more making some interesting moves,most notably when PLA acquired Propak Logistics earlier this year. This equity-backed pallet supplier indicated that it wants to be able to compete with 48forty Solutions and Kamps on a national basis. The amount of competition in the market, as well as equity investment, is what makes this consolidation period so unique.

Also, unlike IFCO in the past, which was fairly unsophisticated in its approach toward automation, both 48forty Solutions and Kamps are buying up plants with more automation as well as putting in more automation this time around. The reason is simple. No matter the size of your company or who owns it, employees are hard to get and retain. So, automation as a major trend seems here to stay.

Many of the companies acquired had some good personnel who have moved into key roles in their new companies. While this occurred in the past, all of these M&A players today are focusing more on attracting top managers and keeping them.

Some independent pallet companies have told me, “These guys will fail just like other big players in the past.” But I don’t know about that this time around. Hoping that your competitor fails is not a strategic business plan. You have to work on ensuring your own success.

Owning the Cores Was Everything, Until It Wasn’t

Don’t get me wrong. You still need cores to be a successful recycler. But it looks like we are entering a market where obtaining cores is going to be easier to achieve. Retailers have started deleveraging and getting rid of extra inventory, which means more recycled pallets are flooding back onto the market. Based on conversations with recyclers around the country, cores are becoming more readily available than at any time in the past couple of years. If an economic downturn persists in 2023, this will drive down core prices and reduce demand. Having cores that are reasonably priced (cheaper) will become far more important than having an abundant supply.

Some of the big players that have cornered some markets and have tremendous excess capacity may have to sell cores at a discount. Or at least they may not be as aggressive when it comes to buying extra supply.

Having strong relationships with core suppliers remains critical. This will always be the case. However, given the shifting market, it is also critical to pay a reasonable price to obtain supply. That’s why smart recyclers will work to educate emitters on changes in the marketplace.

Another major change is the development of more automated solutions to dismantle, trim and optimize recycled lumber. From the Robotic Dismantler by Alliance Automation to the optimized trip saw systems from Alliance Automation, PRS Group and Smart Products, recyclers are becoming more sophisticated in turning waste pallets into usable lumber for remanufactured pallet production. Pallets that otherwise would be ignored can be taken apart easier and turned into lumber to produce more GMA pallets. This automation revolution is changing how some recyclers view odd-sized pallets. And the technology is available to everyone, not just the big players.

Unique Moves by Various Players

The playbooks used by all the companies in the M&A field are similar and yet different. This year 48forty Solutions bought software provider Innovative Data Systems (IDS), which was a stunner for many in the industry. Pallet Track™ software is widely used by a lot of recyclers to track production. A major reason that 48forty made this acquisition was that so many of the companies it had bought had utilized the software. 48forty wanted to invest in the software to improve its functionality and have a bigger say in changes to the program. Plus, the move was somewhat defensive to keep a competitor from buying the software developer. Interestingly, IDS is going to remain a separate, distinct company and will continue to offer software products and services to other recyclers beyond 48forty.

While both 48forty and Kamps have focused on recyclers, they have acquired some companies with new pallet or sawing capabilities. 48forty even bought the recycling-only division of Girard Wood Products in June. This is the first carve-out acquisition deal closed by 48forty Solutions. Kamps added a number of well-known companies in the industry this year with the acquisitions of L&R Pallet Service in Denver, Northland Pallet Inc. in Minnesota, Realm Companies/Westwind Logistics in the Midwest, Pallet Express in Jacksonville and All-State Pallets Company LLC also in Florida. Many of these companies have significant new pallet capabilities as well as strong recycling operations.

PLA showed it wanted to compete in the Total Pallet Management (TPM) space when it acquired Propak. In the battle to control more core supply, Propak manages a third of Walmart’s network. While Propak’s facilities are concentrated in the central and western United States, its footprint spans the entire country, and it has a diverse customer base from coast to coast.

Kyle Otting, CEO of PLA, stated, “This acquisition gives PLA an expanded footprint, greater breadth of service offerings and access to millions of cores. He also admitted, “While core acquisition is important, the greater opportunity here is becoming a holistic supply chain solutions provider that not only provides pallet management services but also reverse logistics services, transportation services and 3PL capabilities.”

Acquiring Propak was a huge move because, at the time, it had over 60 locations across the country with more than 1,700 employees.

Another pallet company that made some news this past year is Millwood, Inc. A major driver behind Millwood’s acquisitions is the company’s culture and faith-based approach to business. Millwood acquired Cleveland Custom Pallet & Crate, Inc.; Austin Pallet Co. in Texas; and Southworth Wood Products in Ohio. In its public statements, Millwood has declared, “Millwood’s mission is that all who come in contact with Millwood would clearly see the love of Christ in all we do and is at the top of our acquisition checklist.” Finding acquisition partners who already share the Millwood faith-based approach is a strong driver for its decisions, as are companies with strong personnel and facilities in the right location. Culture fit is a big deal for Millwood due to some of its unique human resources programs, such as putting corporate chaplains in all of its facilities.

Prediction for 2023

The problem with predictions is that they are usually wrong, including mine. But it appears that the M&A activity will continue in 2023. The pace may slow significantly as the mega recyclers become more selective in who they acquire. Look for them to continue to fill holes in their network. But the flurry of activity may slow if a recession hits in 2023 and demand drops significantly.

These mega recyclers do have larger bank accounts than independents. They do, however, have higher costs and structures. Some are sitting on a large amount of inventory that may limit how much extra inventory they want to take on through acquisitions. The cost of money will also play a factor in the pace of M&A activity. Inflation makes everything more expensive while reducing the multiples that companies can afford to pay. Some recyclers may decide not to sell because they can’t get the same amazing deal that was offered to some of the early sellouts.

Equity investors may also want to reduce their exposure and keep more liquidity if recession fears grow. Mega recyclers will continue to make some deals to be defensive against the competition. They likely won’t offer as much money as they gave to some of the early acquisition targets. And they may apply more discounts to the final price given the fragility of the market. I am not saying the window to sell in the M&A game is over. It just may have gotten more complicated and a little less lucrative.