North America Industrials Trendspotter: Carveouts, aerospace M&A to drive strong second half

News Analysis 11 July

North America Industrials Trendspotter: Carveouts, aerospace M&A to drive strong second half

Markets around the world continued to weather tougher financing conditions and higher inflation in the first half of 2023, and the North American Industrials & Chemicals sector was no exception. While deal value was relatively unchanged from 2H22 to 1H23, it perked up in 2Q, pointing to further strength for the second half.

The value of disclosed deals in 2Q23 reached USD 26.34bn, up 7% from the previous quarter when the total deal value in I&C was USD 24.55bn, according to Dealogic data.

Overall I&C deal value in 1H23 was slightly up from the previous half, at around USD 52.4bn in 1H23 from approximately USD 51.9bn in 2H22. The number of deals was also a tick higher for the same time period, at 907 transactions announced for 1H23, compared with 890 in 2H22. 

A few segments still saw large deals, including chemicals and aerospace/defense despite a slow first half. 

Some of the larger transactions announced in the I&C sector include Apollo's [NYSE:APO] USD 8.1bn proposed take-private of Univar Solutions [NYSE:UNVR], Apollo’s pending acquisition of Arconic [NYSE:ARNC] for USD 5.2bn and Heico’s [NYSE:HEI] announced buy of Wencor Group for USD 2.05bn.


Corporate carveouts, PE add-ons continue

“Add-ons are a bright spot in the current environment,” said Josh Adams, partner at OpenGate Capital. What’s more, inefficiencies across European markets are creating opportunities.

The private equity firm’s focus is about 80% industrials and 20% technology. It invests across Europe and the US. “It’s a pretty quiet marketplace,” Adams said.

But his firm has been “aggressive on buy and build on a platform basis. We want to show inorganic growth in our portfolio companies and deepen our ties with the management teams and use our balance sheets when the capital markets aren’t favorable.”

Adams predicted there will be significant carveout activity after Labor Day based on his conversations with corporations. He said some corporations are offering seller notes and seller financing.

Aerospace/defense M&A takes flight

The aerospace/defense sector contributed about USD 5.3bn in deal value on 48 deals announced in 1H23.

Astronics CEO Peter Gundermann said commercial aerospace M&A is expected to pick up. A sector advisor noted the increase in air travel has contributed to this uptick. He is also seeing more activity by strategics as they view sponsors as being less aggressive due to the current financing environment. He added larger acquisitions by strategics, such as the sale of aircraft parts company Wencor to Heico, could become more common in the second half of 2023.

Strategics in the aerospace/defense sector are also looking to carve out more assets as they evaluate their portfolios, the sector advisor said. In June alone, several examples of this were reported by Mergermarket.

In late June, it was reported that Boeing [NYSE:BA], the aerospace and defense giant, is exploring a sale of its Digital Receiver Technology (DRT) business. Also in late June, it was reported that Ball [NYSE:BALL], the metal packaging and aerospace company, is working with financial advisor Morgan Stanley on the sale of its aerospace business. And in early June, Mergermarket reported that SAFRAN [EPA:SAF] has emerged as the frontrunner to acquire Raytheon Technologies' [NYSE:RTX] actuation business as the process has reached the advanced stages.

Private equity firms are expected to continue looking at assets to grow their aerospace portfolios, two other sector advisors said. One of these sector advisors pointed to the fight between two private equity firms to try to acquire the industrial and aerospace company Circor International [NYSE:CIR]. In late June, private equity firm Arcline Investment Management submitted a binding proposal to acquire Circor for USD 57 per share in an all-cash transaction. Just before that, Circor entered into an amended USD 51 per share deal to be acquired by PE firm KKR [NYSE:KKR] at a valuation of USD 1.7bn.

Automation projected to see strong M&A

The industrial test measurement, automation, and meters and controls sectors will see rampant consolidation even amid weak market conditions and buyer wariness, an industry banker predicted.

Active acquirers in the space include Crestview PartnersConvergix Automation Solutions platform, which has purchased four companies since 2021, and Kaho Partners Addtronics, which is buying up robotic automation groups amid growing demand to solve manufacturing concerns, he noted.

The sector is rife with founder-owned businesses that can sell for robust valuations, even among economic headwinds, the banker added. EBITDA multiples in the space, which includes robotics, conveyors, components, and consulting groups, among other specialists, tend to range from north of 11x-15x, he said. The multiples vary depending on whether the automation companies service non-cyclical markets such as warehouse automation, medical, and food and beverage, he added.

Likely strategic consolidators could be Hitachi’s [TSE:6501] JR Automation subsidiary, Columbus McKinnon [NASDAQ:CMCO], and ATS [TSX:ATS], he suggested.

Meanwhile, test and measurement companies are largely attractive targets because they help buyers with such regulatory requirement-related tasks as monitoring sensor testing conditions in volatile spaces like oil and gas, he added.

A second industry banker concurred that mission-critical spaces such as flow control and test and measurement will continue to see high valuations. Aside from active PE investors like Arcline and KKR, large public players such as Japan-based Innotech [TYO:9880] and Emerson [NYSE:EMR], which in April acquired National Instruments [NASDAQ:NATI] for USD 8.2bn, are expected to continue consolidating in the space, said the banker.

Automation groups serving robust markets such as medical and medtech products are anticipated to be valued the highest, he continued.

Meanwhile, commodity-reliant companies, such as those with a backlog of chips, castings, forgings, and other materials, could see low margins going forward, which could lead to undesirable valuations by cautious potential buyers, the banker explained. This trend could slow down M&A activity, he added.

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