Big deals are back in the industrial manufacturing sector

A significant increase in merger and acquisition (M&A) volume and value in the first quarter of 2011 signals a positive outlook for global industrial manufacturing (IM) deal activity. According to a new PwC report, the last quarter saw 36 deals above $50 million US take place globally, amounting to $16.6 billion US. This is a significant increase of 157 percent in volume and 622 percent in value from the same period in 2010, which saw 14 deals totalling just $2.3 billion US.

“We’re seeing two interesting trends in deal activity, with Canada on one side of the spectrum and global results on the other. Canada is holding steady [in] recent years with a moderate level of deal activity, yet deal volumes and values globally took off this quarter,” said Damian Peluso, partner in PwC’s deal practice.

Canadian results show domestic IM companies are dragging their heels on M&A activity when compared to their global counterparts. Canadian M&A activity remained flat this past quarter with 15 announced deals valued at $69 million US. This is similar to first quarter 2010 when there were 15 transactions with a combined value of $78 million US.

The largest Canadian deal of the quarter was a private equity exit with Clairvest Group Inc. and Clairvest Equity Partners selling Van-Rob Inc. — a supplier to major automobile manufacturers — to Germany’s Kirchhoff Automotive for $35.8 million US.

So far in the second quarter, however, Canadian deal activity has mirrored the global trend of large deal values. Second quarter 2011 has seen two large Canadian deals valued at more than US$500 million take place. The first was Berkshire Partners’ and Omers’ announced acquisition of Husky Injection Molding Systems for $2.1 billion US. The other was Chemtrade Logistics Income Fund’s acquisition of Marsulex Inc. for $546 million US. Both deals were exits of private equity investments.

“The outlook looks positive for continued deal activity in the coming months both in Canada and certainly on a global scale,” said Calum Semple, national industrial manufacturing leader, PwC. “The rising Canadian dollar and shrinking profit margins due to rising commodity prices may drive more consolidation in the Canadian industrial manufacturing market.”

PwC expects four key themes for the Canadian IM sector for the remainder of 2011:

1. Strength of Canadian dollar means greater purchasing power: According to Peluso, “The strong Canadian dollar should allow Canadian manufacturers to go shopping for new equipment to re-tool plants and automate manual processes. Both steps could lead to gains in efficiency and profit margins.”

2. Knock on effects from the Japanese earthquake and tsunami: The continuing effects from the natural disaster in Japan are expected to impact domestic auto production until at least mid-2011. As a result, North American auto manufacturers are seeing an increase in demand for their products, which could make them more attractive takeover targets. Production delays are expected to moderate by mid-year, as several Japanese auto manufacturers are anticipating significant improvements in parts supply.

3. M&A to combat declining margins and to get back in the driver’s seat: The rising Canadian dollar and high commodity prices have squeezed profit margins in the manufacturing sector. “We expect firms to pursue M&A in an effort to cut costs and to become more competitive on a global scale,” said Peluso.

4. Trend of shedding non-core assets to continue: Canadian manufacturers are expected to continue to shed non-core assets in a bid to improve operating margins and performance. These may be legacy assets or are no longer central to the business model. With some companies having held on to these assets since prior to the downturn, the uptick in valuations presents an opportunity to obtain fair value for these assets.

For a copy of Assembling Value, PwC’s quarterly analysis of M&A activity in the global Industrial Manufacturing sector, visit:
http://www.pwc.com/us/en/industrial-products/publications/assembling-value.jhtml.