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Opinion: Mark Humphries
US buyers are driving UK inbound M&A
I've just returned from New York where I was meeting a buyer on one of my deals (in case you're about to visit, it's very cold and snowing) and looking around at the deals being worked on at Catalyst, it's plain to see that US buyers dominate the buyer population on all of our sale mandates.
The UK remains the second most popular target country for US corporates after Canada with the top 3 most popular sectors being technology, professional services and healthcare.
Looking at the stats, inbound M&A into the UK (an overseas acquirer buying a UK company) is down only 10% in 2013 relative to the total UK market, which is 22% down by volume versus 2012; and US outbound M&A is also only down 13% in 2013 relative to the overall US market, which is down 33% versus 2012.
From our dealings with US acquirers, it's clear that the UK is seen as a natural place to acquire due to our stable fiscal and monetary policies, our language and cultural similarities and the UK being a natural bridgehead for US corporates to be able to expand into the EU and further east. Many US corporates have strong balance sheets, significant cash balances, easy access to cheap debt and they are looking for strong growth markets outside the US.
With interest in M&A and corporate executives' confidence in economic conditions both at a high, we predict that by the end of the second quarter 2014 the deal stats will show a marked increase in US inbound M&A into the UK. Hopefully there will be a few landmark Catalyst deals with US buyers to talk about too!
Major composites players boost global market share in Q3
The third quarter has shown itself to be the most active period for M&A in 2013 as companies have taken advantage of opportunities to expand into strategically important end applications, strengthen platforms and integrate supply chains.
Of the 11 deals announced, the one that has grabbed the headlines is Toray Industries’ £364 million acquisition of US-based carbon fibre manufacturer Zoltek. Acquiring Zoltek, which had revenues of US$186 million in 2012, should boost Toray’s share of the global carbon fibre market from 20% to 30%. Toray’s product set has been focused on regular tow carbon fibre typically used in aircraft applications and this deal provides it with access to the large tow carbon fibre used in wind power and automotive applications. These are sectors where significant increases in demand are forecast – Mitsubishi Heavy Industries recently announced that it has established an offshore wind turbine joint venture with Denmark’s Vestas Wind Systems and Zoltek is a major supplier to Vestas.
Zoltek wasn’t Toray’s only deal during the quarter. Toray is forecasting sales of carbon fibre to industrial applications like automotive to be double its sales to aerospace applications by 2020 and in July it acquired a 20% stake in Plasmon Carbon Composites (PCC). Toray is a supplier to PCC, which is the sole US tier 1 supplier of CFRP-based exterior body panels for performance and luxury cars of US automobile manufacturers. This investment ticks a number of strategic objectives and gives Toray more control over its US supply chain, maintains a distribution channel to US manufacturers and creates a manufacturing and development base for CFRP auto parts in North America.
Private equity has also been active during the quarter. AGC Aerospace and Defense has acquired its fifth business, partnering with The Edgewater Funds to acquire UK-based Tods Aerospace & Defence to strengthen its presence in Europe, Asia and the Middle East, and Cathy Investments acquired composites distributor Umeco Distribution from Cytec. The business has long-term supply relationships with a number of composites manufacturers including Jushi Group and Cytec.
These deals highlight the positive outlook for the composite sector and the ongoing priority of the large manufacturers to secure capacity and technology along the supply chain as the use of composites across multiple end markets ramps up. This is presenting small to mid-sized manufacturers with attractive opportunities to scale and broaden their end markets.
A perspective on international M&A
Later this week I will be in Madrid at the bi-annual conference of our international partnership, Mergers Alliance. I'm looking forward to catching up with friends and colleagues from overseas and discussing our cross-border deals.
Undoubtedly, everyone will be keen to understand what is happening in each of the respective markets covered by our 24 member firms. Recent transaction data confirmed that despite the total value of deals increasing by 10% (which was due to a few mega deals), the hard facts are that global M&A is down 18% year-on-year.
In the UK, domestic, inbound and outbound M&A fell 14%, which compared to 30% across deals in the US. The US deals stats in particular represent a staggering year-on-year decline in M&A.
Across other territories there were year-on-year declines of 12% in Germany, 25% in India and 20% in Japan. The one region that showed an increase was China, which grew 4%.
This doesn't make uplifting reading, however I know our business partners in Mergers Alliance continue to win market share in their territories.
From my experience of international M&A in this market there is no doubt that companies are keen to transact, however there remains a high degree of caution and conservatism. M&A has become much more of an exact science and if any element of the risk is too high then the deal will be canned. Nevertheless, with domestic growth still at a long-term low, executives will have to look to M&A to grow and inevitably venture into new geographies, seeking new technologies, capabilities and customers.
I will be surprised if cross-border M&A is still in the doldrums when the Mergers Alliance team meet again next March.
The land of the rising sun - the emergence of Japanese buyers
With low levels of domestic growth, Japanese corporations are looking overseas for acquisitions to access market growth outside of Japan, something the Japanese have been very cautious about doing for a very long time.
For many years, corporate finance advisors would set out a claim for potential Japanese buyers in pitches and business owners would equally convince themselves that the mystical Japanese buyer would materialise and pay a strategic premium for their business; all to no avail.
However, the M&A sun is rising again in the East and the Japanese buyers are coming for Western businesses as evidenced by our recent sale of Celerant, an operational improvement consultancy, to Hitachi Consulting. In fact, over the last 12 months, M&A into the UK by Japanese companies is at its highest level since 2000 at £6 billion.
The good news is that Japanese companies pay premium prices for their acquisition targets given that they tend to be strategically important and, when a Japanese corporate is intent on making an acquisition, it rarely gets outbid or bogged down in immaterial detailed points. In addition, Japanese buyers are extremely well funded and financing is rarely, if ever, a concern when selling to them.
However, the Japanese corporate buyer does come burdened with a reputation of being slow and unable to participate in a Western-style sale or auction process. It is true that Japanese corporations don’t react well to being asked to sign NDAs without knowing the target, being sent a overview teaser with little detail and disclosure, or sent an information memorandum written for a wide scale mass marketing campaign. In our experience, dialogue with Japanese buyers should be started well in advance of other, more acquisitive minded buyers, and you should be prepared to be more open up front about the business for sale and why you think this will be a strategic fit with the Japanese corporate.
The acquisition process of Japanese companies will feel bureaucratic to us and we will never change that. We need to be conscious of this and respectful of it. If you want a Japanese buyer to review your business then it will take them 4 weeks to review a NDA and they will only sign it once the multiple tiers of management have all reviewed and accepted their joint responsibility of its undertaking. Whilst it can feel frustrating, you have to admire the seriousness in which they take the initial M&A exchanges.
To their credit, once you are beyond the initial formal exchanges on a transaction and the Japanese corporation has created, briefed and mobilised its internal deal review team, then they are just as engaging and mobile as any large Western organisation and in some cases better! It is well understood that the internal acquisition approval process remains very formal given the collective responsibility culture and decisions by committee, but a well organized process should be flexible and accommodate this. We just need to understand that major decisions will not be made outside of their formal meetings calendar so there is no point getting stroppy and calling their bluff. One slight oddity for us is working around their rigid internal meeting diaries and needing to agree documents in English three weeks in advance of a final head office sign off so the paperwork could be translated into Japanese.
Finally, Japanese corporates behave similarly to private equity in that they back management teams as much as buy businesses. Japanese corporates are not run with spare resource which is prepared to be parachuted into a western country to run an acquired business. Japanese buyers will expect an incumbent management team to want to stay and carry on running the business. If the Japanese buyer senses any short term aspirations to leave post-deal then they will in all likelihood walk away.
So in summary, the Japanese buyer is a real credible option when selling your business. However, they do require careful and respectful management and if this can be done, then they are prepared to pay premium prices.
FTSE Industrial CEOs - it's a results business!
There are just days to go before the new premier league football season kicks off and it is likely to be another year when there are many managerial changes at the top. Does the same situation occur in our leading industrials businesses? From my regular meetings with CEOs, CFOs and M&A directors across the Industrials sector, it is clear that the management teams feel the pressure of operational and share price performance and that this is becoming increasingly short-term, which is probably their biggest criticism of being listed.
This short-term pressure on results made me reflect on how closely aligned the CEOs of UK FTSE industrial companies are with premiership football managers and I asked our research team to run the slide rule over the stats.
The average tenure of a FTSE Industrials CEO is seven years and this compares favorably (in the post-Ferguson era) to premiership managers where the average length of tenure is just one year.
Interestingly, the average age of the industrial CEO is 53 which is very close to the average age of the premiership managers at 49. This must mean managers across both worlds are at their peak around 50, although in Ferguson's case he remained there for another 20 years! There is only one CEO with greater than 20 years' tenure and that's Sir David McMurty at Renishaw, and he founded the business!
The other interesting statistic is that 80% of the Industrial CEOs are British compared to only 45% of the premiership managers. Unsurprisingly, the remaining 20% are made up of US and European CEOs in equal numbers, whereas the remaining 55% premiership managers are all from Europe and there are no US premiership managers. I wonder why!
So in summary, there appears less diversity amongst the FTSE Industrials CEOs but once you get appointed, you are less likely to be called to the chairman's office for that dreaded vote of confidence.
What do Myers-Briggs, England cricketers and management buy-outs have in common?
As a cricket fan, this could be a great summer with England 2-0 up against the Australians and talk of a 5-0 whitewash. It is hard not to find some small pleasure at the disarray amongst the Australian team – Mickey Arthur getting fired weeks before the Ashes, Shane Watson not talking to Michael Clarke and David Warner punching our star new opener in a Birmingham bar! You couldn’t have scripted it.
So why does the England team – a similiar collection of individuals and personalities - look unified in comparison?
This year the England team has adopted the use of the Myers-Briggs personality test which is being used to promote self-awareness amongst the players and understanding of others in the team. I can just picture Cook, Pietersen, Bell et al all sat in the Pavilion at Lords on a PC completing their 88 questions to determine the four elements of their personality – extraversion/introversion, sensing/intuition, thinking/feeling and judging/perception – resulting in one of 16 personality ‘types’. Then picture Andy Flower delivering the results and chairing a discussion on how the different personalities in the team need to accommodate, support and encourage each other. What would W.G. Grace have made of it all? Well so far so good because the England team look a very strong unit with a strong team identify, and all the egos and strange personality traits seem to be in check.
Many of you will know that Myers-Briggs and other personality tests are used heavily in the work place to support understanding and insight into office dynamics and working in teams. We certainly use them at Catalyst to help us assess individuals and support team working. You might also have seen news of the management buy-out of YSC, which we have just completed. YSC is one the world’s leading business psychologists using sophisticated personality assessment techniques to improve an individual’s and a team’s performance.
Anyone who has completed a management buy-out will know that there will be few times in their career, just like an Ashes test, when it is more important to understand yourself and the team around you. The period of a management buy-out, from the start of the deal process to the eventual sale 3-5 years later, is typically a period of significant change for a business and the senior leadership team. Inevitably there is change required from an entrepreneurial culture to a more corporate, risk-adjusted culture with less reliance on an owner founder and a need for more collective decision making and governance. The members of the leadership team will need a strong sense of self awareness and be able to critically assess their colleagues' skills and relative performance. Everyone in the management team needs to understand how to work best with each other, utilize each other’s strengths and capabilities, and develop a depth of trust. There will inevitably be new members of a management team to understand and integrate, including someone from the PE firm on the board and undoubtedly a non-executive chairman.
So, if you’re thinking about a management buy-out and you want to be a high performance team during and after the deal, then you should grab the nettle and assess yourself and your senior team. It’s not cricket, however you may just get the results of captain Cook and his merry men.
BMW trailblazing the use of composites in new i3 electric car
Today has seen the global launch of the BMW i3, BMW’s premium electric vehicle. I’ve been following the development of the i3 closely, partly because of the high level usage of composites in its design (to counterbalance battery weight, the passenger cell of the i3 is made of carbon fibre reinforced plastic), but also because BMW have designed it to be a volume-production vehicle. The carbon fibre car revolution has been a regular topic of my blogs and, at €35,000, the i3 is a significant milestone in this regard.
In Catalyst’s recent Composites M&A report, Ian Robertson, BMW board member and Head of sales and marketing, highlighted the company’s commitment to being at the forefront of developing the use of carbon fibre in automotive production. The use of composites in higher volume car production has so far been held back by cost and slower production cycle times. For BMW, the crucial weight reduction benefits of carbon fibre has helped offset its higher cost and so made the financials work. To address production restrictions, the company has redesigned the full production chain. To secure technology know-how and a reliable supply of raw materials, BMW established a joint venture with SGL Carbon (in which BMW has taken the usual step of acquiring a stake). Together, they have invested some $100 million in a new US-based carbon fibre manufacturing plant to produce composites exclusively for BMW.
The i3 launch will certainly boost the profile of composites and its potential to increase fuel efficiency in the automotive sector. Significant investment is already being made across the supply chain as OEMs and their suppliers follow a similar path to that of BMW – using JVs and partnerships to accelerate the development of the technology needed to produce composite intensive cars at high volumes. This is also leading to M&A as raw materials manufacturers focus on securing capacity and OEMs and component manufacturers snap-up leading technology and materials. With over 20 deals in the composites sector so far this year, we could be set for another record year for M&A.
I wish BMW success with the i3. In the meantime, I’m off to book a test drive.
Government support for UK Business Services sector - I think Whitehall has heat stroke!
Did anyone else read with the same level of cynicism as me the press release by the Department for Business, Innovation and Skills and the Professional Business Services Council last week?
I certainly welcome the valiant objective of promoting growth in the vital professional and business services sector (see my recent blog on the growing export levels of the business services sector), however the announced measures were really quite feeble and unimaginative.
The measures announced by the government included the creation of a new network of senior overseas business envoys, a series of overseas trade missions, and supporting law firms and accountancy firms with apprenticeships. I think this is a missed opportunity.
Government-funded jamborees rarely end up with constructive actions to help UK businesses grow profits and make money. Also the irony of helping UK accountancy and law firms hire graduates certainly isn’t lost on me – if they had stuck by their talent during the difficult times rather than focusing on short-term partner income, then maybe these firms wouldn’t have a shortfall in numbers coming out of the downturn.
So what measures could BIS and the PBSC support? There certainly isn’t a silver bullet, otherwise I would like to think someone clever would have thought of that already. However, if I was in the hot seat at BIS I would have the following on my list:
Supporting entrepreneurs grow their businesses through access to growth and development funding
Encouraging banks to support our best-in-class business services industry and move away from the culture of ‘not getting fired for saying no’
Changing the attitude of the UK lenders towards people businesses where the assets can walk out of the building, recognising that these businesses have considerable barriers to entry and defensible market positions. We need to have access to experienced lenders of finance who can assess the real strengths of services businesses rather than using a formulaic lending approach based on a business’ fixed and current asset base.
Encouraging private equity, with its proven record of supporting the UK services sector, to help professionalise our owner-managed and entrepreneurial services businesses. Help private equity to bring their invaluable record of internationalising companies into play, as well as leveraging their networks of experienced non-executives to chair these businesse
Giving greater access to funding support for international acquisitions and buy and build strategies as a means of accelerating growth and innovation.
Ensuring UK business services businesses have access to credible and insightful local market data and intelligence to allow business leaders to make informed decisions about market entry tactics.
It is clear to me that the UK business and professional services sector is doing very well indeed and my observation is that this is despite government support, not because of it! If only the government could re-focus its enthusiasm for the sector then maybe the UK would have more scalable businesses leading this key sector and being international ambassadors of our talent and expertise.
$400 billion informatics market and growing fast - the deals keep on coming
The business information industry is undoubtedly growing in its importance as it finds smarter ways to disseminate, deliver and package data for decision makers who are demanding more intelligent information quicker.
The key skill is using software tools and data processing techniques to turn data into information and importantly information into intelligence to support better business decision making.
I wrote a blog about informatics in May 2012 when I cheekily came up with the phrase IaaS (‘Information as a Service’ - as a play on SaaS, of course) noting that business information includes news flow, market research, credit and financial information, economic analysis, asset data, customer intelligence, and business performance and management information.
The recent transaction that further highlights the growing importance in this sector is the acquisition of ParAccel by Actian Corp. Actian is clearly positioning itself to tackle what it terms ‘big data management’ and Steve Shine, Actian CEO, commented ‘The Actian informatics portfolio allows organisations to connect any data, analyse it at scale for relevance and turn into right-time business intelligence.’
This is undoubtedly an environment for management to make better decisions faster and the informatics sector, worth $400 billion, is booming. As the Actian deal highlights, informatics businesses are proving very attractive to investors and acquirers and I am sure we will continue to see a number of very interesting transactions hit the wires over the next 12 months.
Exports booming - in the UK services sector!
The recently published Q1 2013 British Chamber of Commerce (BCC) report proved interesting reading with the UK service sector reaching its previous export peak from 1994!
The BCC report defines the service sector as engineering services, architecture, building services, professional and technical services, education and training, IT managed services and financial services. On reflection, the sheer scale of UK services being exported isn’t a surprise when I think about our clients and recent deals.
Our experience in the services sector working with Foster+Partners (architects), Mace Group (building services), Aston Carter (IT recruitment) and Celerant (consultancy) showed they all have a very significant overseas presence and that they are growing strongly due to overseas market penetration and growth.
These businesses all have scale, a strong reputation with first class credentials, and they are all exporting their strong know-how (people, processes and technology) gained from being market leaders in the UK. Their expansion overseas is typically driven by their international clients with a UK head office encouraging their trusted service provider to open offices overseas to replicate their service offering.
The key challenges they are experiencing when exporting their services overseas include:
Protecting their culture - the culture that made them successful in the first place
Overseas markets tend to be less mature so there is often a growth lag as the market is educated on the benefits of their services
Different working practices overseas which require their market-leading services to be adapted in order to be successful
Hiring strong local office managers with strong networks, local market intelligence and international business skills The UK service sector is undoubtedly an attractive target for overseas acquirers who are either using the target as a platform to support their own international growth, or using the target to import the know-how and skills of the UK business back into their home territory to support delivery in their domestic market.
In summary, the leading UK service companies are performing extremely well and as a result, becoming an attractive target for PE investment to help drive the business on at a faster rate, or on to the radar of the large international serial acquirers. Our recent sale of Celerant to Hitachi Consultancy, a subsidary of Japan's Hitachi Ltd, is a great example of the success of international UK services businesses. We are currently working on a number of transactions with similar dynamics.
The carbon fibre car revolution is coming
In today’s Financial Times composites feature, ‘Carbon fibre suppliers ready to exit the pits,’ I comment on the opportunities in the composites industry – a favourite topic of my recent blogs. In particular, the article highlights the significant growth potential in the automotive sector as OEMs increase the proportion of carbon fibre in their fleets to meet CO2 emissions. The supply chain is working hard to reduce production cycle times and develop the technology needed to deliver higher volume components reliably. Numerous joint ventures and partnerships between OEMs and composites manufacturers, and between those manufacturers and their suppliers, are already achieving significant reductions in cycle times. M&A will follow hot on the heels of break-through technologies as the major automotive component OEMs protect their technology platforms and expand their geographical presence.
This is a great opportunity for the UK composites industry, characterised by a large number of smaller specialists, to increase its share of the global composite market. The winners will be those companies that can gain scale, broaden their end markets and provide an increasing proportion of the composites value chain.
UK auto industry in the fast lane with 007 at the wheel
There is undoubtedly a huge wave of optimism surrounding the UK car industry and I have just witnessed first hand why. I have just had a guided tour of the Land Rover plant in Solihull and to say I was impressed would be an understatement.
Land Rover Solihull is home to the new Range Rover, the new Range Rover Sport, Discovery 4 and the Defender. It was a real contrast to see the Defender line where cars are still built in the ‘Henry Ford way’ versus the modern, highly automated lines making the Range Rover and Discovery models.
There was a huge buzz at the factory and rightly so – sales of Land Rover vehicles are at an all time high and the Solihull plant is forecast to make 300,000 vehicles this year.
It was also very exciting to see the first of the new Range Rover Sports coming off the line. The car is truly stunning and will undoubtedly be a huge worldwide hit for Land Rover when it hits the showrooms in August. The car was launched in New York this week by James Bond star Daniel Craig who drove it through Manhattan as part of a dramatic live launch which you can watch via this link.
Perhaps the most striking part of my tour was the amount of building work going on at the Lode Lane plant. Land Rover is currently completely redeveloping the South Works factory and building a new 90,000 sq ft production facility ready for the next generation of vehicles – it all sounded very exciting and secretive.
So, have we ever had it better in the UK automotive industry – well not for a long time that’s for sure. In addition to Land Rover, the Nissan plant in Sunderland is currently producing 510,000 cars per year and the Toyota plant in Derby is up to 160,000 cars per year.
My tour ended back where it started, at the Lode Lane reception. It was amazing to see how many suppliers were waiting to be met for meetings and tours of the plant. The success of UK automotive plants is clearly creating huge demand on the UK supply chain after a period of heavy rationalisation and cost-cutting. My guide around Land Rover was highlighting a shortage of skills in the UK and, with the OEMs taking their pick of the talent, this is leaving the supply base well short of skilled workers.
It was a thoroughly enjoyable visit and I was almost tempted to drive home via the Land Rover dealer...perhaps it was the £100,000 price tag of a fully loaded new Range Rover that made me drive past!
The higher volume carbon fibre car revolution is coming
Let’s be honest, we all like a little bit of carbon fibre on our car. Even my seven year old Audi has a carbon fibre interior (admittedly all for show!).
Recent luxury sports models including Lamborghini and McLaren have moved well beyond the carbon fibre ‘bling’ in my car with significant structural components to reduce weight and increase stiffness. However, the manufacturing techniques used are labour intensive, expensive and certainly not transferrable to higher volume premium automotive OEMs such as JLR, BMW and Mercedes. The well proven hand lay up and autoclave technology used extensively in the Formula 1 and aerospace sectors by businesses such as Carbotech, GKN Aerospace and AIM Aviation are just too slow for the higher volume premium automotive sector.
The automotive OEMs are being driven hard to reduce the combined CO2 emissions of their fleets. Increasing the use of carbon fibre to ‘light weight’ the car is a clear path to achieve this. It would not be exaggerating to describe the engineering brain power going into the greater user of carbon fibre in the premium automotive sector as nothing short of a space race. You only need to understand the joint ventures and partnerships between the automotive OEMs and the manufacturers of composite raw materials and top end design engineering firms to appreciate the amount of money currently being invested in the use of carbon fibre. Here is a list of the current tie-ups:
BMW and SGL, Mercedes and Toray, JLR and Cytec, Ford and Dow Chemicals, Audi and Voith, GM and Teijin,McLaren and Carbotech, Alfa Romeo and Dallara, Magna and Zoltek
Now that’s a very impressive space race!
So whilst the use of carbon fibre is far from new, the technology now needed to produce higher volume components is definitely new and very much ground breaking. From the meetings I’ve been in recently, it would appear that forged or pre-form composites will become the stand out technology to manufacture higher volume components with repeatable, high geometric stability. This requires an enormous investment which certainly seems to be coming and in the UK, we are undoubtedly blessed with incredible engineering capability from the Formula 1, aerospace and defense sectors to put the UK firmly on the world map of carbon fibre expertise. There is also a high political priority to our success, evidenced by the investment into the National Composites Centre in Bristol.
We certainly think there will be a large number of transactions on the back of these sector dynamics as the large automotive component OEMs secure their technology platforms and roll out their geographical presence.
Given that I plan to run my Audi on for a few more years yet, it certainly looks like my next car will undoubtedly have a significant amount of carbon fibre structural parts. I think that means I will be able to drive faster for less!?!
2013 Pumps and valves off to a flying start
With two deals announced this week at top end prices, the pumps and valves sector continues to be very active.
In October last year I wrote about the US$120 billion global market for pumps, valves and seals and I described them as the unsung heroes of many industries such as oil & gas, construction, mining, chemical processing, power generation, nuclear, pulp & paper, water treatment, pollution control, and the list goes on!
At the time, we said that the sector is one of the most active we have seen with 500 deals worldwide in the last four years and a number of serial acquirers looking to consolidate the market.
Last week two interesting deals were announced with Curtiss-Wright acquiring the severe-service valves specialist Phonix Group in Germany for US$106 million (9x EBITDA) and AES acquiring the aftermarket division of James Walker in Holland. The Phonix Group exit was a particularly interesting story, representing a successful German roll-up of small pumps and valves businesses backed by international PE fund AXA.
These deals highlight the continued consolidation of the market, with the larger players prepared to pay high prices to extend their products and services and access new geographies.
I am sure it won’t be long before we are talking again about M&A activity in the sector.
Advanced materials: Out with the old - in with the new
A news story tucked in between Christmas and New Year was the announcement by George Osborne on BBC Radio 4’s Today programme of further funding to support the research, development and application of the ‘super material’ graphene. In total, £36m has been allocated by the Engineering and Physical Sciences Research Council, a number of high profile UK universities and industrial companies such as Nokia, BAE Systems, Procter & Gamble, Qinetiq, Rolls-Royce, Dyson, Sharp and Philips. In addition, further grapheme research is a frontrunner to receive a 1bn euro investment from the European Commission over the next 10 years.
Graphene is composed of carbon atoms arranged in tightly bound hexagons just one atom thick - the very same material in a lead pencil - but with record-breaking mechanical strength and electronic properties. Three million sheets of graphene on top of each other would be 1mm thick!
Graphene, hailed as the ‘miracle material’ of the 21st Century, is the strongest material ever measured - some 200 times stronger than structural steel - better at conducting electricity than copper, it is impermeable and almost completely transparent. Its properties were first discovered as long ago as 1947 and due to the timing of this discovery some conspiracy theorists have linked it to materials at the Roswell ‘crash site in New Mexico! More recently André Geim and Konstantin Novoselov, scientists from Manchester University, won the 2010 Nobel Prize in Physics for experiments they conducted with graphene.
Graphene is already the subject of over 3,500 research papers and there are in excess of 200 companies and start-ups now involved in the research and development of graphene. There are a huge number of applications and some have even described it as ‘the solution trying to find a problem’. Applications currently being developed include foldable transparent touch screens, solar cells, automotive and aerospace parts, frequency transistors, new surface coatings, electron emitters, sensitive chemical detectors and fibreoptics.
This news story is further evidence of the substitution impact of advanced materials. I witnessed this first hand when I was at GKN in the late 90’s when powder metallurgy took off and we are seeing it now with clients involved with applications in advanced plastics and composites. M&A activity is always strongly linked with material and product development and we predict that 2013 will see further high profile acquisitions by trade buyers and private equity as they seek to ride the advanced materials substitution effect wave.
It is out with the old and in with the new.
The Recruitment sector in 2012 - an annus horribilis?
From my recent discussions with M&A contacts in the recruitment sector it sounds like a blood bath out there for the majority. Q3 and Q4 2012 have seen very soft trading and the short-term outlook for 2013 doesn’t look pretty either. 2012 will certainly not go down as a vintage year with the eurozone crisis hitting revenue and many recruiters started 2012 with a cost base hopeful of a recovery that never materialized which has hit margins hard. Monday last week saw the latest poor results from Michael Page and their share price fell a further 13%.
Unsurprisingly there is a moratorium for at least the next 12 months at many of the big recruiters – Adecco, Randstad, Manpower – as they focus on getting their own house in order before worrying about generating shareholder value through a successful integration of another target.
There have been a few notable deals in 2012.
I was interested to see Allegis acquire Talent2 in Australia to continue their measured expansion out from the US. Another recent deal of interest was the Baird Capital acquisition of legal services SR Group which shows that PE still sees value in small niche recruiters. And finally there was the £234 million tertiary buy-out of NES Global Talent advised by Catalyst which was a real success story of a deal – a great exit for its old PE owner, a smart buy for its new PE owner and a great deal (albeit i'm biased!) for the management team.
So what will 2013 bring in terms of recruitment M&A? In truth, I don’t think there will be much excitement at all. I think 2013 will be a tough year in recruitment and the only deals are likely to be ‘value’ deals where the sellers need to sell. I think 2013 will be more a year of getting the house in order ready to sell once the serial acquirers get their cheque books back out – hopefully in 2014!
Who says increasing regulation and red tape is bad?
We often read headlines berating the increasing amount of regulation, bureaucracy and red tape for UK businesses - but it isn’t all bad…..
A whole new industry has emerged to service the area of governance, risk management and compliance (known as GRC) and it is currently one of the fastest growing sectors in the UK.
Regulatory intervention is undoubtedly increasing across many sectors - such as financial services, construction, healthcare, utilities, travel, telecoms and healthcare – and any failure or shortcoming by companies to address this increasing regulation is big news. Some of the most eye catching headlines recently have been in financial services such as 'Barclays fined £290 million for LIBOR fixing', 'Coutts & Co fined for lack of anti-money laundering controls', 'Lloyds Banking Group further extends its PPI miss selling provisions', 'British Gas fined for poor customer complaints handling', and 'Homeserve fined for mis-selling'. The list could easily go on and on!
As a result of this increasing regulatory intervention, and the financial and reputational impact of improper activity (on both companies and their executives), a whole new sector of prevention and resolution has been born.
These businesses operate across a number of activities such as resourcing, business process outsourcing, consultancy, customer management and technology. The businesses operating across these activities all appear to offer very high barriers to entry and a high quality of earnings due to a number of reasons, namely:
The activity is typically a distressed purchase with a high risk of failure for the client if the regulator or end customers remain dissatisfied
There is a high level of revenue visibility due to the ongoing issues the regulator has put in place to address
The activities tend to be complex in nature and require a detailed understanding of the regulations The winners in GRC sector tend to have an excellent delivery and service track record, a strong reputation, high levels of competency and a very good understanding of the regulatory market.
Given the almost unprecedented level of growth in GRC, the market leading businesses are attracting interest from potential acquirers wanting access to customers and market expertise. I have also been approached by a number of PE firms looking to invest in the GRC sector and they rarely miss a good thing when they see one!
Pumps and valves - the unsung heroes
Fluid motion and control products – pumps, valves and seals to most of us – is a US$120 billion global market experiencing phenomenal growth.
Catalyst has just commissioned some analysis on this sector and the findings I am sure will be enlightening.
Pumps and valves are typically highly engineered components and are critical to moving, controlling and protecting the flow of material. Businesses manufacturing pumps and valves are undoubtedly the unsung heroes of many industries such as oil and gas, construction, mining, chemical processing, power generation, nuclear, pulp and paper, water treatment, pollution control and other general industries.
The sector is one of the most active for M&A I have seen over the last four years with over 500 deals worldwide. Large global players such as ITT, Atlas Copco, Flowserve and Weir are consolidating the sector and looking for strong brands, new product and technologies, geographical reach and access to the high margin aftermarket.
With global growth in the sector being driven by large-scale urbanisation, energy creation and efficiency, and scarcity of resources, it looks like the unsung heroes are set to prosper.
We will shortly publish some detailed research analysing the drivers behind the M&A strategies of global consolidators and the multiples they are paying for strategic acquisitions - contact me for more details.
Cruising at a high altitude - an aerospace sector update
Farnborough is just a few days away now and I was at RAF Cosford recently getting an early dose of fast jet fly-bys!
Catalyst has just completed some fascinating research to support our soon to be published aerospace sector report. In summary:
The number of deals in 2011 was almost at the same level as 2007 (a historical M&A peak) and 56% up on 2009 (a historic M&A trough)
So far in 2012, with almost half the year gone, the levels of M&A are on a par with the first 6 months of 2011
The average deal size in 2011 was £228 million, 17% higher than 2007 and 93% higher than in 2010
The average EBITDA multiple paid for businesses so far in 2012 is 9.4x compared to 10.3x in 2007 and 5.7x in 2009
Interestingly, the highest multiples are being paid in the £50-100 million deal size range at 12.8x EBITDA compared to 2.9x EBITDA at the sub £10 million deal sizes
Throughout 2012, acquisitions by trade buyers have outnumbered PE backed deals by 6-to-1. Back in 2007 the trade buyers only outnumbered PE backed deals by 4-to-1 highlighting the significant fall in PE activity in the aerospace sector
Furthermore, over the past 5 years PE has only exited 61 investments whilst funding 165 transactions in total. Thus there is a significant number of PE backed businesses with pending exits
Thus in summary, deal volumes are holding up well in the aerospace sector and barring a Eurozone collapse it looks like 2012 will be another year to compare to the peak of 2007. Pricing is also almost back to historic peaks although this is at the larger end of the mid-market. PE continues to struggle to invest in the sector and on the one hand is clearly being outmaneuvered and outbid by trade whilst in terms of selling their investments there appears to be a delay in PE making the most of the current deal volumes and prices. This could be down to the debt levels in these businesses being too high and thus the return to shareholders being unattractive or the businesses could be less attractive to the strategic acquirers than hoped.
The aerospace sector continues to feel positive with strong order books, the next generation aircraft overcoming their initial production difficulties and M&A being strong.
Invensys and that elephant in the corner called 'Pension Liability'
This week has seen further speculation regarding Invensys, the £2 billion UK industrial conglomerate. Invensys, which makes control systems for industry, power stations, railways and domestic appliances, really does seem to be getting attention from some very high profile suitors; and understandably so. Invensys has some world class businesses such as Foxboro, Wonderware, Triconex, and other parts of its process controls division, and it is unsurprising that businesses such as Emerson, ABB, Siemens and GE are being linked. Of less interest to these potential buyers will be the rail division which would undoubtedly be spun off.
There is no doubt that the Invensys shareholders will be hoping for a positive outcome having sat on a weak share price for a long time. There have also been considerable management changes and the new team all have strong reputations for 'getting deals done' - enter stage left Sir Nigel Rudd.
However, there is a big elephant in the room which seems to have been overlooked in the latest press speculation this week - Invensys's £4.1 billion pension liability! This remains the poison pill of all poison pills.
The Invensys defined benefit scheme has 85,000 members and the annual cash cost to the group is a staggering £85 million - this is on group EBITDA of £220 million. If any of the current suitors are to buy Invensys they need to preside over the largest ever transfer of an occupational pension scheme out of a British company. That's no small ask.
The other option is to 'hand over' the handling of the pension scheme and the pension liability to a specialist such as Pension Corp, Lucida or Rothesay. However, the shareholders are unlikely to sanction such a move given the likely terms of such a deal to extract such a large liability.
So Invensys is in a very difficult position; some very good businesses which seem to be highly attractive to some world class buyers, yet some very average businesses which will be dragging down its valuation, and a very big pension liability which is an unwelcome addition to any deal.
If I was advising Invensys I would want to get the pension liability dealt with before going into a negotiation on the price of the deal; M&A is challenging enough in this positive but nervous environment without having the pension elephant sat in the corner.
The complex web of mid-market private equity in the UK
If UK mid-market private equity wasn’t already a complex picture, it certainly is now.
With over 200 private equity firms in the UK, choosing the right one to either fund your management buy-out or sell your business to isn’t straight forward. The basic complexities include fund sizes, the amount already invested from the existing fund, the date of the original fund raise and the expected date of the next fund raise, sectors, and the equity investment size range. However, the current fund raising experience is creating an additional level of complexity – namely, which might be the right private equity fund for you to get a deal done?
The current experiences of raising a new fund are extremely diverse. This is due to the LPs’ (the funds behind private equity) flight to quality as they become increasingly selective. In addition, the LP universe is changing for the GPs (the private equity firms) because of increasing financial regulation (such as Solvency II, Basel III and the Volcker Rule to name only three!). All of these factors are placing tighter restrictions on traditional investors, factors you need to be aware of for the opportunity you seek yourself.
In the mid-market we have seen recent fund raising successes from ISIS Equity Partners (fund IV closed in April 2012 at £360 million), Equistone (European Fund IV closed at €1.0 billion in April 2012), Inflexion (fund IV closed at £375 million in 2010) and Phoenix (£450 million fund raise in 2010). The key reason for the successes of these firms is being able to clearly articulate a ‘best in class’ investment performance, a senior and stable investment team and a clear competitive advantage in terms of attracting deal flow.
However, there has also been high profile fund raising failures from Duke Street and Arle (formerly Candover). This will inevitably create a high level of nervousness from those mid-market firms either in the market fund raising now or planning to come to market in the next 12 months; funds such as Gresham, RJD, Lyceum, Dunedin and Graphite. Competition for funds is going to be high – not a surprise then that all private equity firms are coming under much greater scrutiny from LPs than ever before in terms of governance, transparency, fees and track record.
Many firms such Alchemy and Montagu are also seeking fund extensions. This is typically where they are approaching the end of the 10 year life of the fund and the firm has either failed to fully invest the fund (due to lack of opportunities or being beaten by their competition) or because they need more time to successfully exit their investments outside of a fund deadline to support a successful story and enable the next fund raise.
In summary, UK mid-market private equity is a fast evolving space due to the changing make-up of the LP and GP investor base. Being on top of these changes is critical to selecting the right PE firm to engage with.
Behind every great decision lies great information
The business information industry, or ‘informatics’, is fast becoming one of the most important sectors in its own right. It is currently estimated to be worth nearly $400 billion. In an environment when management are under pressure to make better decisions faster, informatics as a service (‘IaaS’ – you heard it here first!) is set to grow very rapidly.
Business informatics includes the collation and processing of data to create information. Importantly the sector is developing sophisticated tools and techniques to turn the information into intelligence by which better business decisions can be made. With advances in technology, the informatics industry is finding smarter ways to disseminate, deliver and package the information for the decision makers who are demanding more intelligent information quicker.
Business information typically includes news flow, market research, credit and financial information, economic analysis, asset data, customer intelligence, and business performance and management information.
From a M&A perspective there have been some very interesting deals in the informatics sector and transaction multiples are top quartile.
CHKS, a UK healthcare informatics business, was sold to Capita, the UK FTSE 100 outsourcer, and Iasist, a Spanish healthcare informatics business, was sold to UBM, the UK multi-national publisher. Both businesses use anonomised patient data to benchmark hospital performance to help clinical directors and hospital CEOs with performance management.
Airclaims, a aircraft informatics business was sold to McLarens Young International. Airclaims has developed a comprehensive technical database of the ownership details and full service histories on over 90,000 commercial aircraft. The information is sold to major airlines, airports, MRO organizations, insurance brokers and underwriters, the financial community, regulators and aircraft OEMs.
Informatics businesses are proving popular with investors and acquirers because of their revenue model which tends to be subscription based. This means informatics business have strong accrued revenues and deferred income and they are cash flow positive.
The battle ground is set for acquisitive corporates and private equity to have a straight shoot out for the best informatics businesses!
UMECO takeover highlights attractions of composites
UMECO, the UK advanced composite materials supplier, has announced an agreed deal to sell to Cytec, the US $2.6 billion listed speciality chemicals and advanced materials business.
Demand for advanced composite materials is forecast to double in the five year period to 2015 due to its considerable weight reduction, without loss of strength, compared to the various forms of metals.
Composites is now a commonly used material in the aerospace (e.g. aero structures and interiors), auto sport (e.g. gearbox covers and wings), wind (e.g. turbine blades), premier automotive (e.g. wing mirrors and splitters), defence (e.g. armoured vehicles) and recreation sectors (e.g. racing bike frames, rackets, skis and golf clubs).
This meteoric growth is certainly set to continue in the transport sectors with the weight reductions being a major driver in CO2 reduction. The latest Boeing and Airbus planes - B777, B787, A380 and A350 - all heavily use composite aero structures and interiors. However the strategic goal of a number of composite material and parts suppliers is the penetration of composites in the mass production end of the automotive body parts market. The forthcoming Jaguar C-X75 is set to be the first production car with the majority of body parts being composite for example.
The acquisition of UMECO looks a very good acquisition for Cytec. UMECO will enhance Cytec's brand and reputation in composite materials and processes and add proprietary resin formulations, tool design capability, and materials and process design know-how. Cytec will benefit from supplying fibre product through the UMECO distribution channels.
The deal is priced at 9.4x EBITDA which looks very good value given the forecast growth in the composites niche and UMECO's strong international market position in the aerospace & defence, motor sport and wind sectors.
Catalyst predicts further M&A in advanced materials and composites in particular. The market is high growth, very fragmented and heavily driven by advancements in materials and processes. There are some large consolidators such as Cytec, Hexcel and GKN who are active acquirers of technology, market penetration and advanced capability.
GKN drives growth in the industrials sector
That bastion of the UK industrials sector, GKN, reported some impressive 2011 results this week.
Having been a member of GKN's M&A team in the late 1990’s, it remains close to my heart and I am pleased for the new CEO Nigel Stein, who was the Powder Metallurgy Group Finance Director during my time there, that his first set of results could be delivered with slightly more than cautious optimism.
GKN has strong market positions, supported by market leading technology and a broad international footprint, both of which have clearly helped sales grow 13% year on year to £6.1 billion. In a period when the economic climate has, and continues to be, extremely uncertain and when ‘flat’ is the new ‘growth’ for many industrial businesses, these results really do stand out for me.
There has been double digit growth across all of GKN’s key markets – automotive, civil aerospace and off-highway – with the only downbeat news coming from its military aerospace operations which unexpectedly fell 7% last year.
I was also impressed with GKN’s operating margins which are holding firm across all divisions and in some cases creeping up. There will be huge pressures within these businesses to deliver cost reductions to customers on existing platforms, keenly price new work and absorb raw material price increases. EBITDA margins now stand at over 11% which is pretty good for a business like GKN after all.
I think 2012 looks reasonably good for GKN and other businesses operating in the same sectors.
- Civil aerospace is set to have a strong year with Boeing and Airbus order books at record highs and production ramping up on A380, A350 XWB and B787
- Automotive is experiencing strong technological development in material substitution and advanced driveline technology reaching lower cost vehicles
- Off-highway will continue to operate strongly due to the peak of the agricultural cycle and product development in the construction sector
GKN is now trading on 16.5x EV/EBITDA multiple which is pretty smokey so it looks like the market also agrees that short term success is set to continue for GKN and hopefully the rest of the industrials sector.
In M&A terms, GKN is clearly back in business acquiring two german business, Stromag and Getrag in 2011 and today it is rumoured to be running the slide rule over Volvo Aero. Extrapolating this confidence, I suspect we will see a large number of industral deals in 2012 as the serial acquirors, such as GKN, look for technology and strong market positions to help them maximise organic market growth across their market segments.
Boost for UK infrastructure spend
UK companies supplying into UK and international infrastructure projects are set to gain from the double benefit of Government proposals announced at the end of 2011.
The proposals, which stretch over the next five years, seek to invest £30 billion in 500 infrastructure projects in the UK, as well as continue investment in infrastructure across China and India and developments in Brazil and Qatar ahead of their forthcoming major sporting events.
Whilst the Autumn announcement may not have held the headlines as long as George Osborne had hoped, the effect on the UK supply base will be long lasting and a big boost for many suppliers into major transport, energy, communications and water projects.
The government’s commitment to the investment fund is £10 billion, with the remainder to come from pension funds, sovereign wealth funds and overseas infrastructure developers and contractors. The projects earmarked for investment include roads, rail links, upgrading broadband infrastructure, drainage and sewerage pipes, and power generation and transmission.
Inevitably, with a window of opportunity like this, there will be industry consolidators seeking to acquire businesses to help them win and deliver as much of this work as possible. Many of these acquirers may well be international companies experience slow growth in their home markets.
I expect to see an increased amount of M&A in the first six months of next year in order that acquirers can integrate and take full benefit as soon as possible.
Recruitment sector M&A volume says it all
Announcements over the last week from publicly quoted recruitment businesses make very difficult reading if you focus on it as heavily as I do.
Michael Page, so often seen as the UK’s leading recruitment business, has issued a surprise profits warning and this downbeat news was followed by announcements from SThree and Hays. The poor economic outlook and the eurozone crisis are understandably impacting the staffing market in both contracting and permanent roles. History has taught us that these large recruitment players are a bell weather for the wider economy and their current challenges are pointing to a difficult 2012. I think the most worrying part of their respective announcements is that their Asia and Latin American businesses are slowing dramatically. I think we could all take an educated guess that UK recruitment was difficult however to hear that the recent engine room of the recruitment sector was slowing is a real concern.
Catalyst has just completed a piece of research into M&A volumes in recruitment from 2005-2011 which paints an interesting picture and points to the recruitment sector effectively shutting for M&A from mid 2011.
In 2005 there were 153 deals involving UK recruitment firms and this rose to a peak in 2007 of 243 deals. There was then a relative small fall in activity in 2008 which then fell significantly in 2009 to only 102 deals. In 2010 the confidence of the recruitment acquirers returned and the M&A levels rose steadily and this confidence continued into early 2011 – probably as a result of deals taking longer to close and the buyers and sellers feeling committed to the deal at this point and wanting to conclude what they had started.
However there has been a significant fall in the number of recruitment deals in the second half of 2011 implying that the actual confidence was taken out of the recruitment M&A market from the start of 2011.
What is interesting is that the recruitment M&A market probably only opened in early 2010 and closed again in late 2010. There was a very small window when the buyers were confident enough that their own businesses had stabilized after the 2008 economic downturn and that they could see enough green shoots of recovery across their own business to have the confidence to acquire again. Those recruitment businesses who sold in 2010 and early 2011 got their timing perfect through good judgment and good fortune.
I will be writing my thoughts on the prospects for the market in 2012 in coming weeks..
Quality engineering assets remain big business
Three large deals in the space of little more than a week involving private equity investment show that the market for quality engineering assets remains buoyant despite more pressing global concerns.
KKR’s $1.12 billion acquisition of Capital Safety, the UK-based maker of safety harnesses this week, following hard on the heels of Doughty Hanson’s purchase of Asco from Phoenix Equity Partners and KKR’s own investment in US based Samson Investments, shows that deals can still be financed in the current climate, albeit with ever more challenging debt and equity structures.
As the lively discussion during the industrial and engineering group meeting at our own international partnership conference in South Africa demonstrated, engineering remains near the top of the list for quality dealflow around the world right now. As the head of our own engineering and industrials team here in the UK, I am positive that this impetus is not going to subside for some time to come, particularly if the bid speculation that has just started up again at my old company GKN has anything of a grain of truth in it!
2011 M&A Volumes still up - a pleasant surprise
Today’s FT makes difficult reading. The economic commentary is a blood bath and QEII looks inevitable.
However, M&A statistics published this week were surprisingly positive. Global M&A volumes are up year to date by 5% compared to this time last year, fuelled by strong M&A volumes in the US (up 20%) and Europe (up 10%)
Interestingly for UK companies, the growth in M&A volumes is due to cross border activity (internal and outbound) with domestic M&A (UK acquirers and sellers) down year on year.
My reflection on these statistics is that clearly corporates and private equity firms remain positive, if somewhat nervous, buyers and that M&A strategies remain strong and sentiment towards M&A high.
What wasn’t surprising is that average deal sizes are down year on year by 11%. In my view this will be down to keener pricing from acquirers and business performances below prior year levels from many companies.
If our current experience is used as an M&A barometer then M&A volumes look set to remain above 2010 for the remainder of the year with the usual pre Christmas hiatus of completions!
An Evolving story in asset management
Recent news of an approach for Evolution Securities does not surprise me.
There are undoubtedly some interesting conversations going on round the board table at Evolution, with an official approach being tabled by South African rival Investec and speculation at the time of writing that other international suitors are circling including Canaccord Financial.
Alex Snow the CEO has a number of things to consider on top of weighing up potential approaches, including managing the day to day business, replacing the finance director who recently and unexpectedly resigned, as well as looking to make acquisitions himself with the private client business of BNP rumoured to be of interest.
Evolution includes traditional investment banking, equity trading and asset management. Investment Banking and Equities has given notice that they expect to make zero profits this year, mainly due to over capacity and continuing weak markets. Evolution is finding the market difficult and looking forward the waters only look choppier with flotations at a low level and a lower proportion of mid-market M&A transactions being serviced by investment banks such as Evolution. Investec already has a team covering these services which leads me to suspect that this arm of the business would be divested or significantly rationalized if acquired.
However the asset management business is undoubtedly the jewel in the crown with £6 billion under management. I am sure that this is where the growth potential is and there are a number of obvious reasons why a potential buyer will to bulk up and acquire Evolution’s asset management arm namely the lower asset values in the market, rising employment and IT costs, falling fees and tightening regulation. On this basis I expect to see more suitors enter the race for Evolution targeting the prize of the asset management business.
In conclusion then, whilst I cannot predict what will ultimately happen to Evolution, I am sure that there will be increased consolidation in the wealth management and private banking space as the race continues to acquire greater critical mass and more assets under management.
Electronics at war - and I don't mean Call of Duty on the Xbox 360!
This is a difficult period for UK defence businesses.
For those businesses supplying hardware for traditional defence applications there are very few new programmes being commissioned and progressing to production. In the US, the base line defence budget is flat in real terms and the delay in the appropriation of the 2011 budget has meant many programmes scheduled for this year have been delayed. In the UK, the MoD is redesigning its procurement process to reduce its budget by taking out back and middle office head count and by driving better value for money from fewer suppliers.
However, the level of international tension is clearly still high (e.g. Libya, Syria, Afghanistan, North Korea, China missile testing, Somalia pirates etc) driven by political unrest, regional disputes and actions of rogue states and terrorist groups.
As a result, businesses with components and products in the broader national and international security and intelligence markets are performing well at home and abroad. Innovative electrical engineering businesses are supporting these markets with improved information superiority, command and control systems and secure communications to fight on the modern day battlefield. Many of these businesses are catching the eye of the large US and UK tier 2 and 3 consolidators such as Honeywell, MOOG, Parker Hanninfin, Smiths, Cobham and Ultra Electronics.
We think engineering electronics is going to continue to grow strongly and be a hot area for M&A activity in 2011/12.
Manufacturing has organically grown itself into the mood for M&A
A number of manufacturing businesses close to Catalyst have signalled renewed interest in M&A recently.
Sterling has continued to weaken following its pre Christmas bounce and this weakening has significantly helped UK manufacturing businesses export overseas, in particular to the Eurozone, US and China.
This growth in the revenue and order books of manufacturing businesses, after taking out significant costs throughout 2009/10, has resulted in many specialist manufacturing businesses with highly engineered, added value products, strongly grow profits and cash organically during the first half of 2011. In many cases the organic growth has reduced debt levels and put balance sheets into a state of such good health that many businesses are now considering acquisitions for the first time in a long time. We have become very active with acquisition searches for a number of clients over the last couple of months.
However a weakening in sterling equally makes cross border M&A for UK manufacturing acquirers expensive which is likely to mean a higher proportion of UK-to-UK and inbound M&A in the short term.
German engineering companies back on track
I’m not surprised to read news this week that Germany’s engineering and industrials indices ended 2010 reporting strong growth.
Indeed, based on the regular conversations that I have with our German partner firm, it was no surprise to learn that Germany’s industrial powerhouses have been pulling well ahead of the trends in the rest of Europe and delivering impressive growth figures.
Our own recently published research into the sector (Click here for report) predicts that M&A in the German market will pick up strongly in 2011 now that the worst effects of the recession appear to be over and order intakes, particularly from abroad, are on their way up. Whilst we saw some initial impacts of this in the mid-market in late 2010 (most noteworthy being IMI plc’s £120 million acquisition of German firm Zimmermann and Jansen), I’m sure that 2011 will bring fresh opportunity for both inward and outward capital investment into Germany.
Given also the high number of engineering assets in Germany held by private equity firms, I’m going to be following this market closely over coming months given its likely impact on M&A here in the UK.
UK Manufacturing - Top of the Class!
So, the UK manufacturing sector is surging again, says a survey this week from the Engineering Employers Federation which says the sector will outperform the rest of the economy next year.
I can’t say I’m surprised though, given the evidence from some of my own clients and contacts over recent months.
This isn’t a result of sudden exchange swings, or a shift in trading style necessitated by the UK’s own recession. This is a direct result of something I have been saying for years - the underlying philosophy of manufacturers here in the UK is that the world is one big trading opportunity. We now need to start copying this thought process in our other key industries if we are going to recover from our current perilous economic position!
We’ve long led the way overseas with engineering giants like IMI, BAE and my old employer GKN having led by example for decades rather than years. Whether by acquisition or by organic growth it is a trend that I do not seeing ending for some time to come.
Cyber warfare is big business!
Fresh from the acquisition of L1 Identity by Safran and BAE, marking yet another round of interest in the cyber warfare and broader homeland security market, this month’s Inc. 500 ‘Fastest growing privately owned businesses in the US’ brings home yet another truth about the US market.
Homeland security is big business!
Running an eye down some of the businesses near the top of the list opens my eyes to how businesses in this sector are growing fast, buoyed by continued expenditure by the US government and increasing fears from insurers and corporates that yet more attacks on their security are only a matter of when rather than if.
Given the UK’s traditional place as an innovator in new technologies, and in particular an expert in developing service based propositions (which should work well for many areas within homeland security), I’m therefore not surprised to see so many promising companies in this sector operating (and growing) in the UK market. Despite the pressures on defence (and indeed governmental) spend both in the UK and US, this should be a market that prospers for some time to come.
Defence companies go on the offensive
In the meetings I’ve had as follow-ups to new contacts made and existing friends met again at Farnborough (see last post), I’ve really been struck by the sheer diversity of approach to tackling the forthcoming SDSR (Strategic Defence and Security Review) which seems to be crippling the stock prices of many quoted Plcs in the defence sector.
Faced with inevitable UK defence cuts (indeed if you study the impact of the previous Labour government you realise gradually that the defence budget in real terms has been flat for years, despite major investments by that government in areas such as health), as is often the case, it is the smaller, more agile private (and at times private equity owned) companies in the UK who are responding best. Forging new sales pipelines (I’m informed Saudi Arabia is a particularly ‘hot’ market at present), investing in R&D for new products and riding on the appetite for security (if not defence) that exists in the massive US market, there are still some that are prospering despite the inevitably tough times we face.
Whether this can continue will take time to play out. However, for now, it seems that the sector is very much on the offensive.
It's Farnborough week - time for the M&A rumour mill again!
M&A rumours and the Farnborough Air Show go hand in hand like transfer talk and the World Cup! Today’s chatter is that US acquirors are running the slide rule over Hampson Industries, the UK quoted aerospace tooling and composite and metallic components manufacturer.
Hampson’s shares stood at 52p per share yesterday resulting in a market capitalization of £145 million. Following February’s fund raising net debt is currently £82m and thus the enterprise value is £227 million valuing Hampson at 4.8x March 2009 EBIT and 7.7x 2010 expected EBIT. If I add a typical 30% take over premium to the current share price this would put a 9X 2010 expected EBIT price tag on Hamspon – a good price for today’s shareholders but certainly not a knock out price. If there is substance to this rumour I would certainly expect a number of US suitors and the premium to today’s share price could be much higher.
Hampson may be the first rumour at this week’s show but it won’t be the last! There has been a dearth of M&A activity in the sector over the last 2 years however the aerospace sector is considered to be at the bottom of the cycle and many new deals are expected to be announced this week marking the road to recovery in the sector. UK assets are looking good targets for US acquirors with relatively cheaper pricing compared to similar US assets and the exchange rate helps make UK assets feel more affordable.
Tomkins - UK industrial business goes West
A club of Canadian private equity houses has bid 325p per share for UK industrial and automotive focused Tomkins. This bid values Tomkins at an enterprise value of £3.2bn – 6.9x 2009 EBITDA and 4.8x 2010 expected EBITDA.
Tomkins is seen one of the last of the great UK industrial conglomerates although in truth 93% of its products are made outside of the UK and the US represents 52% of its end user markets. Its disappearance from the stock exchange will be more a symbolic one.
However it is encouraging that both Tomkins management and these PE funds see positive signs of sustainable improvement across its markets in automotive, industrial products and building products. Tomkins manufacturers product ranging from drive belts, gears, hydraulic hoses, remote tyre pressure systems and axles for off road vehicles. Tomkins appears to be seeing an increase in end user demand rather than any restocking and margins are improving due to increased volumes with a much tighter cost base. Over the last 18 months Tomkins has closed 25 facilities, reduced its headcount by 4,500 and taken 20% off its sales line by shedding loss making activities.
Although the offer received a cool reception from Tomkin’s major shareholders yesterday it is unlikely that a competing bid will materialize if it looks like the Canadian’s will receive support from the executive team.
Undoubtedly Tomkins will not be the last UK engineering business to be a target from North America – pricing is relatively cheaper than similar US assets, there is more liquidity in the US debt market at the moment giving North American PE funds more fire power and making them more deliverable than their UK counter parts, there is undoubtedly a pent up demand for M&A and the exchange is helping make UK assets feel more affordable.
Healthcare intelligence key to Lansley's White Paper
The coalition government has set out the most radical shift of power and accountability and the largest structural upheaval since the NHS was established.
The White Paper "Equity and Excellence: Liberating the NHS" aims to devolve power from Whitehall requiring GPs to buy secondary care for patients via commissioning consortia by April 2013 – less than 3 years away.
Personally I see a great deal of risk in the transition of commissioning to GPs:
GPs hold patient care and medicine as their guiding principle. They are rarely business minded, financially astute, commercially savvy or strategists. This feels like a potential disaster waiting to happen and an odd time to introduce an ideological driven policy forcing GPs to become captains of industry at a time when £20bn needs to be taken out of the NHS budget.
There is already a commissioning knowledge base in the NHS within the PCTs. It will be no surprise when these people form the nucleus of the commissioning consortia so I do think this is a waste of time and probably money whilst the system is re invented using the same people. However, there is universal agreement that the NHS needs to be reformed to be efficient and focused on health outcomes.
The White Paper offers a big opportunity for private providers to drive efficacy and efficiencies in the NHS using its business wide skills developed in other sectors such as education where the private sector has supported education delivery for a long time. As is normally the case, with regulatory change and seismic changes in the landscape, I expect M&A activity to follow as the large healthcare players acquire businesses and re align their services and expertise to take advantage of the changes.
One such area will be in healthcare intelligence. To make intelligent decisions on healthcare provision the commissioning consortia will need clean, reliable and robust outcome based data. In its own right this basic data has limited value. However many private providers are skilled at turning data into knowledge so intelligent decisions can be made by commissioners and patients and ultimately payments can be made based on results.
Expect to see healthcare intelligence providers such as Capita, Dr Foster and undoubtedly new entrants at the heart of the new White Paper implementation and inevitably they will be involved in the land grab to acquire expertise and market position in healthcare outcomes.
Star Wars fighter - big boys toy?
I've just been given an advance preview of a spectacular picture of Taranis, the UK’s concept demonstrator stealth unmanned combat air vehicle (UCAV).
Developed by BAe, Rolls Royce, QunetiQ and GE Aviation (formerly Smiths Aviation) over the last three and a half years and a million man-hours it keeps the UK at the forefront of worldwide engineering excellence and innovation in aerospace and defence technology.
These are uncertain and unsettling times in the UK aerospace and defence supplier base with a Strategic Defence Review expected in the Autumn and defence spending cuts inevitable.
However, complex, technically demanding and innovative projects such as Teranis demonstrate the skill base in the UK and it is no surprise that UK businesses continue to be attractive to investment either via private equity or overseas buyers.
UCAVs are an interesting development in our armoury and other countries such as the US (X-47B), China (Anjian ‘Dark Sword’), Germany (Barracuda), France (nEUROn) and Russia (SCAT) are all at the stages of developing their own flying demonstrators.
Assuming the MoD commit to buy UCAVs will only form a part of any air forces future capability and Taranis order numbers are likely to be low. UCAVs will probably priced similar to current first strike fast jets such F-35 JSF and Eurofighter at $30-40m each so the only likely savings in this environment of austerity will be training and support.
However, as with most aerospace and defence technology advancements there will undoubtedly be many spin offs into the wider aerospace and defence sectors and then probably into the automotive sector.
Car Wars - what does the zero emission race mean for the UK component industry?
The Geneva Car Show is always a great showcase for exotic and fast cars. However last week’s show was host to the early exchanges in the car wars as the major OEMs staked their claims in the development of their electric/hybrid models. Even Porsche, who once stood proud with their rear mounted Boxer engines, were showing off their hybrid concept. Whatever next – a diesel 40 mpg Aston!?
This could all be very exciting news for the UK automotive suppliers who have survived a torrid economic downturn and 15 years of cost downs and process re-engineering.
UK suppliers are at the forefront of automotive engineering and the OEM zero emission car wars will help them restake their claim on the world stage. By 2020, 10% of the world’s car parc is forecast to be electric/hybrid cars and this means we are set for a step change in automotive technology development. Whether the electric car or hybrid win the day in 50 years time no one really knows, however the functionality of the constituent systems of the car won’t fundamentally change in terms of transmission, powertrain, suspension systems and braking. The supply chain is well placed in terms of engineering expertise to harness technology and new materials and develop stronger, lighter and safer components.
I expect the UK winners in the automotive supply chain to become increasingly important to the OEMs. They will either receive a tap on the shoulder and be asked to increase their own critical mass and robustness or they will become the targets of those that do receive the tap on the shoulder. If you are one of these suppliers, now is the time to carefully manage your growth, sensibly fund your development costs and working capital and decide whether down the line you want to be a consolidator or start to eye up your future partner now.
Contrasting fortunes in the defence sector
There have been contrasting fortunes for two large UK defence businesses in early January.
Firstly, Qinetiq issued a second profits warning in only seven weeks blaming the significant and rising cost of the war in Afghanistan which is resulting in defence cut backs by the Ministry of Defence and US DoD in Qinetiq’s high tech core markets. This highlights the short-to-medium challenges faced by some businesses focused on providing equipment and services in the defence sector and the importance of being on the right programmes in the short term as a number of departmental budgets are cut and then cut again.
In contrast, Chemring, the UK based ammunition, explosives and countermeasures manufacturer announced the acquisition of US headquartered ADG for £36 million, a multiple of 8x 2008 (2009 results not available) operating profits. This complementary acquisition will assist Chemring access the important Middle East ammunition market and brings with it specialised machining capabilities which can be used throughout the group.
Expect further contrasting announcements such as these as the defence contractors on the larger scale, high cost and technology driven programmes continue to suffer short term pain, whilst those defence contractors supplying equipment and services to the front line perform well and acquire to access new markets and new expertise.
Is this the start of the outsourcing M&A gold rush?
Last month I wrote about the likely impact of public spending cuts on M&A in the outsourcing sector.
On cue, last week end’s press leaked VT’s interest in Mouchel and throughout the week both sides appear to have been locked in meetings with shareholders and advisors working out their next moves on the chess board. Unsurprisingly, there has been further press speculation regarding other potential players interested in Mouchel such Serco and Capita – the UK’s two largest public sector outsourcers. There is clearly a long way to go but there are strong signs that Mouchel will be taken over and at 300p per share this would value Mouchel at 8.4x EBITDA.
It is clear that there will be lower levels of public spending over the next five years and this will result in excellent opportunities for the outsourcing businesses supplying central and local government as a way to drive efficiencies and take out public sector cost. However what is clear from VT’s interest in Mouchel is that the larger players need to get larger themselves so they can drive cost out of their business to retain the profit margins they have become accustomed to.
I think this is the start of an outsourcing M&A gold rush and there will be more consolidation to come.
Public sector spending cuts - good news for M&A?
For many years some of the highest rated businesses on the stock market such as Capita, Tribal and Serco have built considerable businesses off the back of public sector outsourcing by central and local government and much of this growth was achieved through acquisition. In parallel, many private equity backed businesses have also grown sharply on this outsourced expenditure, acquired further businesses in this area and ultimately sold these businesses to larger corporates or secondary buy-outs and made healthy returns for their investors.
An inevitable consequence of the banks bail out program is the need for central and local government to cut expenditure to help reduce the huge levels of government borrowing. The 2010/11 public sector budgets have already been set and whilst these will be lower than 2009/10, there is very little in truth that a change in government next year can do to further reduce these budgets. However we hear that the Tory shadow treasury team are running their economic models with public spending cut by as much as 35% in 2011/12.
Whilst this will cause real pain to any company focused on public spending budgets – companies focused on healthcare, education and training, local government services, defence – every cloud has a silver lining. For many companies there will be a real opportunity to help central and local government drive its efficiency agenda and drive out costs. In our view companies involved in productivity consultancy, IT services, software and informatics (the use of information to highlight areas for improvement) will do extremely well and on this basis we expect these companies to quickly become the acquisition targets of the support services sector consolidators very soon.
Uncertain times for defence sector
Reductions in defence budgets are an inevitable consequence of the huge increase in government borrowing to bail out the global economy. Many large defence projects are being pushed back and remain unapproved, and several risk being cancelled. In this environment it is all but impossible for suppliers to the defence sector to invest in plant and equipment, people and R&D.
The US is looking to cut defence spending by 10% and the rumours are that the UK will follow with cuts of up to 30%. UK projects at risk include two 65,000 tonne aircraft carriers - £1 billion already spent; 230 Eurofighters - 55 already received at a cost of £3.8 billion; order may reduce to 100 planes; A300M transporter plane – already delayed by 4 years; C130K replacement - £500 million already spent; Trident ballistic missile - £20 billion replacement; 3,000 Future Rapid Effects System (FRES) armoured vehicles - £12 billion order may be reduced to cover only 600 vehicles
The government has to walk a fine line, balancing the short term need for spending cuts with the imperative to provide British troops in Afghanistan and Iraq with the best equipment.
Businesses supplying the defence sector were once popular investments for private equity and multinational industrials owing to their high earnings’ visibility and the strong long term growth drivers. The huge uncertainty around short term defence budgets and the potential impact of a change in government make selling or buying a business exposed to the sector very difficult. Revenue visibility is poor and key investment decisions are on hold. Valuing the business is very difficult and banks will be nervous about agreeing long term facilities. Owners looking to sell their business are best advised to hold their nerve, focus on protecting margins and wait for the sector to settle.
Long way out of the woods for engineering sector
The sector faces two huge challenges when the economy starts to recover – how to fund the increase in working capital as production increases and weak balance sheets will drive customer supply decisions.
Many manufacturing business will have faced some of their greatest challenges over the last 12 months coping with falls in demand for their products by up to 40%. Major costs will have been taken out of the business in terms of people and overhead, suppliers with have gone bust, credit insurance will have been slashed and banks withdrawn funding.
As production increases a business’s working capital funding requirements will grow and this will cause problems for many businesses in a market where banks are still extremely reluctant to lend. Borrowing against working capital will be extremely difficult where a business has a concentrated group of customers or significant overseas sales and ironically more businesses could fail as we come out of the recession compared to when we went in.
Equally important, I expect a further significant shake up in the supply chain as, in addition to quality and price, security of supply becomes an increasingly important factor. I expect the original equipment manufacturers at the top of the supply chain to exert significant influence over their key suppliers to buy financially weak but still very competent suppliers as a way of protecting the production chain.
UK manufacturing was well prepared for the economic crisis
The engineering and manufacturing sectors were arguably the best prepared sectors in the UK for the down turn.
For many years these sectors have suffered due to competition from low cost economies, lack of investment in infrastructure and capital equipment, and unfavorable foreign exchange rates.
However over the last 15 years these challenges have shaken the sector to the core and as a result the UK engineering and manufacturing sector has needed to focus on what it is good at. This sector is now firmly focused on high value added niches, creating strong and defendable intellectual property, high design-to-build capability, and testing.
In particular these success stories are most prominent in UK automotive, aerospace and defence, and the oil and gas sector.
The research team at Catalyst is preparing an in depth study into M&A activity across these sub sectors. The report will identify the key trends shaping M&A strategies of trade buyers and private equity and predict where M&A investment flows will be focused across these sub sectors over the coming years. A summary of this report will be available on our website soon.
Regulation in financial services will drive growth opportunities and M&A
The global financial crisis will inevitably result in unprecedented levels of central bank and government intervention and regulation in the future in order to stabalise the financial services sector and put it in on a more robust and sure footing for the future.
The Basel II measures and capital requirements are widely agreed to have failed the banks during the downturn and further ‘Basel’ regulations are expected. In addition Solvency needs implementing across the insurance sector.
Significant investment spend is expected across the financial services sector in order to optimize the existing infrastructure, re-engineer risk management processes, increase transparency, improve analytical capability across multi jurisdictions, and address control issues.
This increased regulatory environment will result in significant growth opportunities for businesses operating in risk and change management advisory, system architecture design, application development, process re-engineering delivery, and performance testing.
A number of the sector BPO providers, consultancies, IT managed services business and private equity businesses are keen to find acquisition opportunities in these areas and take advantage of the inevitable growth wave over the next few years. There will undoubtedly be a sharp increase in M&A in these areas.
Private equity sharpens focus in current climate
The current lack of appetite by the banks to lend debt to management buy outs and the relative performances of different businesses has resulted in private equity sharpening their focus on which businesses they see as an attractive investment opportunity.
I have met a number of the mid market private equity houses in London over the last few weeks and they are very focused on wanting to invest in businesses with the following characteristics:
- Long term revenue visibility, preferably supported by long term contracts;
- Strong levels of intellectual property and protected know how;
- Strong asset backing to underpin a business’s valuation and to make sure debt is easier to raise; and
- Broad spread of high quality customers to ensure there is no reliance on a small number of customers.
If you are considering a private equity deal in the short term then you will need to make an honest assessment of your business against this criteria.
M&A in healthcare IT remains buoyant
Healthcare IT continues to be an active space for M&A. This month both UBM and Ascribe have made acquisitions.
Catalyst advised on the sale of Iasist, the leading provider of benchmarking data and software in Spain and Portugal to UBM, the global business media company, for £9m. Iasist will form part of UBM’s medical division, CMP Medica, which provides information and education services to healthcare professionals and patients. Iasist was sold by Healthcare Knowledge International, the private equity backed heathcare IT group, which also sold CHKS its UK subsidiary to Capita plc in February.
Ascribe, the healthcare IT group, which provides a wide range of software to the secondary healthcare market, has acquired iClinix, a software solutions provider to cancer and kindey specialists with its head office in Sydney. Ascribe, completed a £33m public-to-private transaction in January 2009 backed by the mid market private equity fund ECI Partners.
Healthcare IT is very fragmented and clearly remains a very interesting space for the larger acquisitive trade buyers with well capitalised balance sheets as they continue the ‘space race’ to own business in the sector with strong intellectual property and long term contracts.
Catalyst will soon be issuing its healthcare IT report which will be a comprehensive review of M&A trends in this space.
Pay and benefits sector attracts M&A interest
We have recently met a number of interesting business operating in the pay and benefits sector. A number of these businesses are performing very well as companies look to find ways of retaining key talent and using alternative benefits to substitute real cash pay rises. Undoubtedly the larger trade players and private equity will be looking at these businesses as potential acquisition targets knowing that they will possess a number of anti recessionary features and hoping they can find some vendors willing to sell.
Last month the merger between Watson Wyatt and Towers Perrin was announced creating the world’s largest pay, benefits and investment benefits consultancy with 14,000 workers. Despite the successes of the mid-market operators, these large businesses have been struggling since early 2008 as their multinational clients have been through some deep cuts in their own overhead bases. I think we will see a number of these nil premium mergers between larger support services players as they search for cost synergies to keep their profit growth moving forward at levels which their market valuations demand.