Strategic buyers and PEs ready for a shake-up of agreements in the industrial sector

For industrial deals closed in the first quarter of 2024, activity was primarily driven by energy, technology and healthcare, says James Frawley, managing director and head of industrial M&A at Truist Securities. “There is activity, but it’s not broad-based,” he says. “Large caps are coming back, and we expect mid-market activity to follow.”

Industrial deals are expected to rebound in 2024 as investors reconsider their approach to antitrust compliance and portfolio review, according to investment bank Capstone Partners.

Faces we lose, Faces we win

Despite the difficult context for mergers and acquisitions, industrial negotiators say they are seeing some improvement in the market.

“We’ve done more deals in the last nine to 12 months than we did in the previous 12 months,” says Tony Blanchard, managing director of Deloitte Corporate Finance’s industry group. “Now that there is a little more certainty around interest rates, we are more optimistic than we were a year ago. Although we have not reached pre-COVID-19 activity levels, we are getting there.

The antitrust environment continues to pose a serious challenge. The Federal Trade Commission and the Justice Department are focusing on what they call “excessive market consolidation,” and are holding firm to the Biden administration’s approach to antitrust enforcement. In 2024, mergers and acquisitions are expected to face increased scrutiny as revisions to the Hart-Scott-Rodino (HSR) Act will require organizations to provide detailed information about companies and their revenues in advance. This is expected to increase the filing burden, according to law firm Squire Patton Boggs. Other antitrust concerns include increased regulatory scrutiny of monopolistic activities, price fixing, and bans on non-compete agreements, although lawsuits could slow this process.

In this context of tensions, Frawley believes that companies must be vigilant and have a plan. “They need to be prepared and, if necessary, make divestitures to resolve problems,” he says. The industrial and technology sectors accounted for 14.8% and 14.5% of all divestiture transactions in the fourth quarter of 2023, respectively, according to Deloitte.

High interest rates have also dampened mergers and acquisitions, but most dealmakers have accepted Federal Reserve Chairman Jerome Powell’s “persistent inflation” and “higher for longer” interest rate environment.

Michelle Ritchie, head of industrial products transactions at PwC, believes businesses are having to deal with continued uncertainty around the world, which will contribute to a “turbulent” market over the next six to nine months. “There are the summer months, the elections and the holidays. It’s not an easy season to manage processes, accomplish tasks and bring everyone to the table,” she says. “So it’s going to be a creative challenge. »

Frawley sees optimistic tailwinds for M&A activity on the horizon, including a possible decline in interest rates, supply chain normalization, a start to a decline in freight rates from their peaks, and the passage of the Inflation Reduction Act (IRA) and CHIPS Act. The IRA’s $1.4 trillion in private equity and $780 billion (Brookings Institution estimate) to $1.2 trillion (Goldman Sachs forecast) in infrastructure money could also boost industrial deals in 2024.

“If you take advantage of that room, you have $3 trillion or more of purchasing power that needs to be invested over the next two to three years,” Frawley says. “Corporate balance sheets are very healthy, and private equity needs to return capital to raise money. Those are tailwinds that we see over the next six to 18 months.”

Strategies vs Private Equity

Eric Andreozzi, managing director and head of industrial activities at Deloitte Corporate Finance, notes that strategic transactions exceed those in private equity by two thirds. “The market has been geared towards strategy. That said, private equity is adapting to what I call the new interest rate normal. So now we see private equity regaining ground,” he said.

According to Andreozzi, more than half of the mid-market deals in 2024 will be made by strategic buyers. “When we talk about strategic buyers, we mean both pure-play strategic companies and portfolio companies of private equity groups,” he explains. “Over the last two years, add-on acquisitions have dominated private equity activity, and much of the money invested has been in strategic acquisitions aimed at growing existing businesses.”

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Mid-sized industrial companies are likely to be more attractive than larger targets, in part “because the Justice Department generally has less regulatory scrutiny,” Ritchie says.

Companies are also examining strategic gaps to fill, while considering which assets to divest. For example, Stockholm-headquartered Electrolux Group, which manufactures household appliances globally, announced in September the sale of its Memphis, Tennessee, factory to a United States-based investment firm. UNITED STATES. The divestment is part of Electrolux’s broader efforts to divest non-core assets, according to a press release.

“Companies that are willing to act and do so will have a competitive advantage in the next 18 months,” Ritchie says.

An industrial overview

Some representative deals in the industrial sector so far this year include:

In March, The Home Depot announced it had entered into an agreement to acquire SRS Distribution, a distribution company specializing in the residential sector, for $18.25 billion. Under the terms of the agreement, SRS Distribution will operate as an independent business unit within The Home Depot, focused on accelerating growth in the professional market, according to a press release.
In May, Monomoy Capital Partners, a private investment firm focused on the middle market, announced an investment in Southern Outsides, a full-service installer of exterior building solutions for single-family home builders in the southeastern United States.
In June, L2 Capital completed the acquisition of Robbins Sports Surfaces, a manufacturer of hardwood basketball floors for elementary and secondary schools, colleges, the NCAA and the NBA.

The industries category encompasses a wide range of sub-sectors, each of which presents specific opportunities and challenges when it comes to business growth and mergers and acquisitions. Here’s a look at other dominant trends within industry subsectors, according to Deloitte:

Automobile

U.S. auto sales are expected to reach an estimated 15.5 million units in 2023, an increase of 11.6% from 2022.

Increased deliveries, improved supply chain and stronger dealer incentives boosted new vehicle sales in the fourth quarter of 2023.

Interestingly, original equipment manufacturers (OEMs) reported average profit margins of 7.8% in Q1 2024, down from an average of 8.5% in 2023. Automotive OEM profit margins were 5.6% in Q1 2024, a relatively stable figure, highlighting the 13^th During the quarter, OEM margins exceeded those of suppliers, according to Bain & Company.

Electric vehicle sales, both in terms of volume and market share, also increased in the fourth quarter of 2023, with sales reaching levels 52% higher than in the fourth quarter of 2022. More than 317,000 electric vehicles were sold between October and the end of December 2023, representing 8.1% of all new cars sold.

“We’re seeing some of the new electric vehicle programs slow down and get delayed because there may be a saturation point of demand right now,” Blanchard says. “Another vehicle segment is commercial work trucks, but those are really difficult to electrify right now.”

Paper and packaging

Deloitte reports 96 M&A deals in the U.S. packaging sector in 2023. The industry continues to focus on automation and robotics, advanced materials, outsourced services, and smart packaging technology.

“We’ve been doing business in this industry for 20 years,” Andreozzi says. “This is a constantly growing market and we are seeing both strategic and private interest in all the companies we work with. »

Specialty Chemicals

As the U.S. chemical sector continues to evolve, Deloitte reports that companies in the sector are moving toward sustainability by reducing and ending greenhouse gas emissions, investing in wastewater treatment, increasing bio-based production efficiencies, and using alternative low-emission pathways. Specialty chemicals accounted for 61% of industrial sector deals in 2023, according to Capstone Partners.

Construction materials

Housing starts fell 8.8% year over year and existing home sales fell 19.3%, stalling the housing market in 2023, according to Capstone Partners. The slow housing market weighed on building products deals, with just 124 M&A deals completed in the U.S. and Canadian building products and materials sector in 2023, down 25% from 2022. As interest rates decline, however, housing market activity is expected to pick up.

Stabilize the outlook

While industrial strategy and private equity firms could see increased activity in the second half of 2024, Ritchie expects mid-market activity to be very consistent and stable, with more mega-deals in the last three to four months of the year. This should lead to even more activity next year. “I think there are a lot of tailwinds for 2025 to be a very robust deal market for both buyers and sellers,” she says.

Cynthia Kincaid is a journalist with extensive experience writing about the financial and healthcare sectors.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.