Bluebox Industrials Report 2018

May 25, 2018

Executive Summary – Industrials

The total value of completed deals in the Industrials sector in Q1 2018 reached $122.5bn, 1.5x higher than that of Q1 2017. This was mostly owed to two megadeals. Despite this, compared to Q1 last year, the first quarter of 2018 saw a 12% fall in deal volumes with 765 reported transactions. The decline has been attributed to political uncertainty, with many sub-sectors heavily reliant on the stability of market conditions. Access to cheap capital means private equity firms are now equipped with vast amounts of dry powder and going forward, this will enable them to compete more effectively on price with strategic buyers.

Technology is fast-becoming a key focus area for M&A and this itself is a costly investment. Over the past half-century, the lean revolution (1970s), the outsourcing phenomenon (1990s) and the advent of automation (2000s) have each transformed the industry as we know it. Today, digital solutions are responsible for fourth major disruption in modern manufacturing, referred to by many as “Industry 4.0”. Industry 4.0 is transforming plant floors, production lines, business models and strategic planning – in many ways, a true reboot of the sector.  Industry 4.0 is also impacting M&A strategy. In March this year, Wartsila Corporation (Finland), manufacturer of power generation and marine propulsion equipment, agreed to acquire UK-based, Transas Marine, for £185m. The marks their second software acquisition in the last year, as Wartsila look to lead the industry’s transformation towards a Smart Marine Ecosystem The transaction is expected to close in H2 2018.

In Europe, total deal value in Industrials was $44.9bn in Q1 2018, a 2.6x increase in comparison with the same period last year. The spike was primarily driven by two megadeals. Making the headlines of all UK news outlets was Melrose’s hostile £8.1bn ($12.1bn) takeover bid for engineering giant, GKN. The deal saga began at the start of the year and as at March 29th, a majority shareholder vote was cast in favour of the takeover. The deal was subsequently approved by the Government at the end of April, after initial concerns from the Defence Secretary, regarding the potential threat to national security, were calmed with a series of post-offer commitments from Melrose. At present, Melrose own 94% of the shares in GKN, and it is expected that the remaining 6% will be acquired in June. The second megadeal was the €10.1bn ($12.5bn) acquisition of AkzoNobel’s specialty chemicals business by private equity firm, The Carlyle Group, and its partner GIC, a Singapore-based investment firm (announced in March 2018). This stands to be the largest ever leveraged buy-out in the chemicals industry. The deal will enable the chemical business to leverage its independence to seize opportunities for growth that were previously hindered by competing against the AkzoNobel’s coatings business for investment. In turn, AkzoNobel will use this as an opportunity to focus on its coatings business.

Among the sub-sectors within the Industrials industry, Industrial products and services accounted for the highest total deal value for Q1 2018. This has been the case for Q1 in 4 out of the last 5 years. Chemical and materials came next, superseding Transport & Logistics, but largely due to the sale of AkzoNobel’s chemical business. Without this, both Transport & Logistics and Manufacturing would have performed better.

With low interest rates, plenty of cash in the pockets of both strategic and financial investors, and Industry 4.0, we anticipate 2018 to be an active year for M&A in Industrials.

 

The impact of e-commerce on Transport and Logistics (T&L)

E-commerce has been expanding over the last few years and displacing traditional brick and mortar outlets in many cases. According to Statista, global retail e-commerce sales were $2.3bn in 2017, marking a CAGR of c.20% since 2014. Furthermore, it is anticipated that sales will grow year-on-year, reaching $4.1bn by 2020. Growth in e-commerce translates directly to growth in transport and logistics (T&L), for companies in this space are those facilitating the increasing need for delivery of goods. Coupled with rising demand from consumers for free shipping and faster delivery, the importance of “last-mile” efficiency improvements has never been of such paramount importance.

On 27th March, global logistics giant FedEx announced its acquisition of P2P Mailing Limited (“P2P”) for £92m.  P2P is a global provider of e-commerce transportation solutions. It offers customers unique last-mile delivery options via its network with private, postal, retail, and clearance providers in more than 200 countries. The company has rapidly grown over the last few years since being previously acquired by The Delivery Group in 2016 for £30m. P2P will sit below FedEx Cross Border, a subsidiary of FedEx, allowing FedEX to expand its e-commerce capabilities.

Further demonstrating the impact e-commerce is having on T&L was the speculation towards the end of last year that e-commerce players, Home Depot (home improvement supplies) and Amazon could be entering a bidding war for trucking logistics operator, XPO Logistics (“XPO”). It was said that any acquisition could cost as much as $9bn. Amazon have recently been expanding their e-commerce offering into larger products such as appliances and furniture and are also planning on building a new distribution centre. Thus, there would be strategic rationale in looking at acquiring a last-mile logistics business like XPO with experience in delivering heavier goods. On the other hand, Home Depot’s online sales channel accounts for $6.5bn of revenue, and is said to be growing by more than 20% each year. Any deal with XPO would not only complement this budding sales channel, but also provide a bonus in so far as keeping it out of the hands of Amazon. Rumours have quietened down since January, however, as e-commerce continues to expand, it would not be surprising if something were to resurface again.

On April 2nd, 2018, Ryder Systems (“Ryder”) announced the $120m acquisition of logistics services provider, MXD Group. Ryder are the second largest last-mile delivery provider of large goods in the US (behind XPO). The deal is said to position them well to enter the e-commerce space, particularly as more and more large goods are purchased online. With MXD under its belt, the expansion of Ryder’s network means that they can offer a two-day delivery network across Northern America. Trends in both e-commerce and technology are driving the need for businesses to invest and to consolidate. As this continues, we foresee further M&A activity within the T&L sector later this year.

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