Golden period predicted for UK engineering sector
The weakness of sterling has created the opportunity for an export-led recovery in the engineering sector and boosted the chances of significant further inward investment in the UK according to new research from Catalyst Corporate Finance.
Catalyst found that over £18 billion of inward investment has been ploughed into the UK engineering sector over the last four years, with almost half channeled into two key sectors; aerospace and oil & gas engineering. Over 75% of this investment came from overseas with the USA accounting for the majority of this figure. Deals included the £2.4 billion acquisition of Smiths Aerospace by GE and the £906 million buy-out of Abbot Group plc backed by First Reserve.
With a fall in the relative value of sterling of around 25% against all major currencies since the peak of 2007, engineering businesses in the UK are now extremely well positioned to grow their presence in international markets. Catalyst predicts that those sectors in the UK with a distinct global comparative advantage will deliver the highest levels of growth and attract most investment, citing three key reasons for this belief:
In addition to increased price competitiveness, UK firms are uniquely well placed to capitalise on the geographical shifts in demand affecting most engineering markets. In oil & gas for example, British firms have made great progress in selling state-of-the-art well and subsea technologies developed in the North Sea to the markets of South East Asia and West Africa. This has led to many small and medium sized companies generating greater proportions of their revenues from overseas operations than from their home market.
Catalyst expects that inward investment into the UK through M&A will increase substantially. This is because foreign buyers will look to secure particular expertise and access to international engineering markets through acquisition, using the relative strength of their own currencies to exploit the lower cost of buying firms based in the UK.
The UK is about to embark on the biggest investment programme in its power infrastructure for a generation. This will create great growth opportunities for UK firms in both nuclear and wind power. It is inevitable that overseas players will want to access these high growth markets and will acquire British businesses to do so.
Catalyst also predicts that part of this additional investment in the sector will come from private equity, in particular in those industries tied to energy production. “Our work shows that private equity’s interest in the oil & gas sector has a direct correlation to the price of oil. As oil prices peaked at the beginning of 2008, so too did the level of private equity oil & gas deals. Investments were made by a range of firms including Candover, Goldman Sachs, Close Brothers and Inflexion Private Equity amongst others”, said Catalyst Partner Mark Wilson. “With further rises in the oil price forecast, we are aware that a number of private equity houses are actively looking to invest again at the moment.”
Catalyst’s new research is captured in a comprehensive report into the UK engineering sector. The report analyses M&A transactions in the engineering sector in the UK over the last five years, covering a broad range of end user markets including aerospace, oil & gas, automotive, defence and power.
