Quick Due Diligence Results in a Strategic Acquisition

One of our clients, a leveraged buyout firm, identified a Libyan plastics packaging company, PackingCo*, as a promising acquisition target. The goal was to leverage PackingCo’s established market presence and explore new growth segments. The firm required a deep and expedited due diligence to ensure a swift decision-making process amidst a competitive landscape.

Strategic Priorities

The acquisition’s success depended on two critical factors:

1. PackingCo’s ability to sustain its leadership position in its core market.
2. Potential for PackingCo to enter and compete effectively in a new market segment.

Given the urgency, we were engaged to conduct an intensive four-week due diligence.

Approach and Methodology

Our due diligence focused on four pivotal areas to assess PackingCo’s strategic and economic value:

1. Market Sizing and Dynamics: We evaluated the total addressable market for plastics packaging in Libya, analysing current demand and identifying growth trends. This included assessing macroeconomic indicators, industry reports, and regulatory frameworks, providing a clear picture of market potential.
2. Market Penetration and Competitive Positioning: We assessed PackingCo’s market penetration and competitive positioning. This involved a detailed competitive analysis, evaluating PackingCo’s market share, key competitors, strengths, and weaknesses, and historical performance. This analysis was crucial to understanding PackingCo’s ability to expand its market footprint.
3. Operational Efficiency and Margin Improvement: Our operational review identified opportunities for margin enhancement. We examined PackingCo’s cost structures, focusing on fixed and variable costs. We found significant potential for cost savings through operational efficiencies. Optimising plant utilisation could increase non-SG&A EBITDA margins from 25% to 33%, and reducing SG&A expenses from 11.5% of sales to below 5.75% within a year was recommended.
4. Customer Insights and Revenue Stability: We conducted in-depth interviews with PackingCo’s key customers, gaining insights into customer satisfaction, contract longevity, and potential improvements. This assessment helped gauge revenue stability and identify strategies to enhance customer retention and secure long-term contracts.

Competitive Landscape

PackingCo faced substantial competitive pressures. A prominent national competitor utilised proprietary technology to achieve production speeds 34.5% faster than PackingCo. This technological edge allowed the competitor to increase throughput and reduce per-unit production costs, positioning them favourably in the market. Furthermore, a significant regional competitor benefitted from cost efficiencies by sharing production facilities across multiple business lines. This strategic integration enabled them to optimise resource utilisation and lower operational expenses. These competitive advantages underscored the imperative for PackingCo to enhance its operational efficiencies and cost structures to remain competitive.

Strategic Recommendations

Based on our comprehensive analysis, we provided several strategic recommendations aimed at bolstering PackingCo’s competitive position:

1. Capacity Utilisation: We advised maximising plant utilisation to improve production efficiency and enhance EBITDA margins. By optimising the use of existing facilities and increasing throughput, PackingCo could achieve greater economies of scale and reduce idle time, thereby lowering overall production costs.
2. Cost Reduction Initiatives: Implementing aggressive cost reduction strategies was paramount. We recommended a thorough review of SG&A expenses to identify and eliminate inefficiencies. Streamlining administrative processes, renegotiating supplier contracts, and leveraging bulk purchasing were among the strategies proposed to lower SG&A expenses, thereby improving profitability.
3. Investment in Technology: To keep pace with competitors, we suggested significant investments in advanced technologies. Adopting cutting-edge production technologies would enhance production speed and efficiency, reduce downtime, and improve product quality.
4. Customer Relationship Management: Strengthening customer relationships was crucial for long-term revenue stability. We recommended enhancing service offerings and improving contract terms to secure long-term commitments from key customers.

Outcome and Impact

Our swift and detailed due diligence enabled the client to make an early and strategic bid for PackingCo. The acquisition, executed without opposition, was highly successful. Within two years, PackingCo’s EBITDA more than doubled, increasing from 13.8% pre-purchase to 32.2%. This significant improvement exceeded the client’s expectations and positioned PackingCo as a formidable player in the Libyan plastics packaging market.

*We take our clients’ confidentiality seriously; whilst names are changed, outcomes remain real.