One of the iconic commercials of the 1980s features the now-essential plastic item in every household, the trash bag, in which the promoted brand was put to the test against its wimpy, wimpy, wimpy competitor. Dealmakers hope comparing 2010’s pace of M&A to last year’s flow will allow them to boast hefty volume and consolidation.
Ebitda for the sector suffered throughout 2009, and only companies with a performance record during the recession are running numbers and commanding multiples that were truly appetizing. Of course, the occasional distressed seller popped up with a worthwhile asset, but sources who spoke with IDD's sister publication M&A Journal said only companies viewed as high-quality came to market. Raw materials costs ran high at a time when manufacturing suffered a downturn, providing a double-whammy impact to the sector that is still felt.
“Nobody wanted to sell from depressed numbers in 2009,” said Robert Fitzsimmons, chief executive and managing director of High Road Capital, a New York-based middle market PE firm. “There was not a lot of activity in the market.”
Although the beginning of this year did not showcase a frothy market, dealmakers are talking Ebitda multiples up for what they say will be a year-end consolidation spree. The strength of the manufacturing industry is now lending the industrials sector more credibility and stability. Multiples can reach up to 10x in robotics, automation and components sub-sectors, but generally hover in the 6x to 8x range. Companies making plasticizers and adhesives might fetch slightly less, some said.
Strategics unloading assets reversed course and are finally on the offensive. Consolidation will come from above, in the form of large-cap companies looking to buy earnings. Earlier this year, Eastman Chemical Co. acquired Arsenal Capital Partners’ Genovique Specialties Corp. Peter Friedman, corporate strategy director of United Technologies, which bought GE Security in March, said his company would soon cease its recent divestiture campaign. A UBS report posted at Thomson Analytics said FMC Corp. has an ongoing mandate toward consolidation, specifically in the biopolymer space.
International strategic players are considering acquisitions as well, said Scott Eisenberg, managing partner of Amherst Partners and co-founder of IMAP-Detroit. In the near term, the middle market M&A scene will have strategic buyers coming to North America from China and India, he said.
Strategic players coming to market now sought to do so late last decade, when private equity buyers were dominating auctions, said Jim Lavelle, co-head of Houlihan Lokey’s industrials group. Now, they have the playing field at auctions leveled by diminished financing opportunities for financial buyers.
“Strategic buyers were losing pretty regularly” in years leading up to the recession, Lavelle said.
No more, says Eisenberg. From billion-dollar market cap companies like FMC to the lower middle market, 2010’s back end will showcase sellers’ improved operations and buyers eager to consolidate proprietary technology.
Still, they will have competition from private equity.
Fitzsimmons, High Road Capital, and plenty of other PE firms are preparing for deals. Fitzsimmons said his PE firm’s Milwaukee Gear Co., which manufactures gears for industrial compressors, HVAC and other general applications, will go on the hunt for bolt-on deals this year. Russell Greenberg, co-founder of Altus Capital Partners, said his private equity firm—which counts among its industrial assets Thermafiber and Thomson Plastics—is charting bolt-on deals as well.
Even though money is no longer as cheap as it was during the LBO heydays of last decade, sources who spoke with the M&A Journal felt lenders have become increasingly flexible. Domestically, there is a swath of cheap, often empty real estate in the Midwest that professionals say can be used to pare down cost if consolidation plays can be executed in the region.
“PE has been dormant for the past year,” Lavelle said. As with strategic players, this will be short lived, he feels. “Leverage is becoming more available.”
The historic highs of debt multiples in 2007 (around 6.1x) shriveled last year to 3.8x, said Raj Trikha, managing director within KeyBanc Capital Markets’ industrials group. That has recovered, he said, to around 4.5x this year. But there is little optimism lenders will be much more flexible in the near term.
Eisenberg predicted his clients would not garner much more than 5x debt multiples in the near term. This still would represent a marked improvement.
“Debt markets have improved substantially,” Trikha said.
Private equity firms looking to complete deals to build scale are turning to family-owned businesses for bolt-on opportunities.
Because of the expected rise in the capital gains tax, Lavelle said, families will look to sell this year. Some will come looking to better diversify their legacy investments after suffering through the recession; others have already been made green with envy watching consolidation of strong companies fetching attractive multiples in a rising market.
“A lot of our clients were very concerned… because of uncertainty about their own businesses and about a double-dip recession,” Trikha said.
But families selling by the end of 2010 will have to fight off valuations still depressed by last year’s figures—something that makes for a buyer’s market. Dealmakers expect more M&A in 2011, when companies can point to 12 months of results from rising markets—something that, for families looking to limbo underneath the capital gains tax, might not be worth the wait.
“For private owners, it is an unfortunate timing issue,” Trikha said.
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