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M&A Predictor 2018: Industrial Markets

M&A Predictor 2018: Industrial Markets

While there was significant merger and acquisition activity in 2017, Industrials remained relatively subdued. This year should see factors such as the consolidation of mid-tier players, high capital availability, and company reinvestment, stir activity.

Stewart May

Partner, Transaction Services

KPMG Australia


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Australian outlook – Strong themes in industrial markets

In 2017, Mergers and Acquisitions (M&A) activity was buoyant across a range of sectors, but much of the activity was dominated by consolidation in the financial services sector, overseas investment in infrastructure and healthcare, and government privatisation processes aimed at recycling capital towards nation building.

However, amongst this activity, the industrial markets sector remained relatively subdued, and has not typically featured as a hotspot in the M&A league tables.

In 2018, we expect that high capital availability, a strategic imperative for corporates to reinvent business models in facing down the threat of disruption, and lower organic economic growth conditions, should all underpin a continued level of M&A activity. Our 2018 CEO Outlook report showed that around 9 out of 10 CEOs have a growth agenda – so much of this will need to come from reinventing business models or M&A.

On that basis we remain optimistic in the 2018 outlook for Industrials, despite the findings of our global survey suggesting a more benign environment.

This optimism is supported by the following macro themes across certain active sub-sectors:

  • Consolidation: We expect to see continued consolidation of the mid-tier players in sectors like transport and logistics, where scale is paramount to cost leadership, and investment in technology can be leveraged across a bigger base.
  • Foreign expansion: We expect to see leading Australian businesses looking to fulfil global ambitions, such as we’ve seen with Reece’s acquisition of MORSCO, Reliance’s acquisition of John Guest, and Nufarm’s acquisition of a portfolio of assets emerging from the Adama and Syngenta merger.
  • Energy relief: As companies seek relief from Australia’s high energy prices, we expect to see global expansion or investment in renewables by energy intensive manufacturers.
  • Rationalisation: We expect to see continued rationalisation or company-transforming acquisitions, as boards pivot business models towards higher growth sectors.
  • Nation building: We anticipate substantial nation building infrastructure programmes by government will drive high activity levels amongst the contractor base, with the mid-tier and support sectors positioning to win via consolidation and alliances.
  • Regulatory change: This should drive opportunistic M&A, such as we’re seeing in the waste management sector, with import bans across Asia driving change in business models.
  • Bolt-ons: As the Private Equity community grows its share of Australian funds under management (FUM), we can expect to see the general Industrials sector acquiring natural bolt-ons as capital is recycled. For example, Equinix’s acquisition of Metronode, EBOS’s acquisition of HPS Pharmacies, and Culligan’s acquisition of Zip Industries.

Global outlook

The Industrial Markets sector posted another robust year of M&A activity, in line with our 2017 Predictor report, and global players are expected to remain in the deal-making 'fast lane' for 2018 as the race for technological innovation and business transformation continues.

infographics industrial

"We do expect the Industrial Markets sector to exhibit a sustained healthy appetite for deals and plenty of significant activity this year. As anticipated and predicted, we saw 2017 continue the hot trend of 2016 dealings – and 2018 looks promising for this trend to endure," says Danny Bosker, KPMG in the Netherlands.

His optimism exceeds what we are seeing for 2018 as reflected in the M&A Predictor data: the forward P/E ratio, our measure of corporate appetite for M&A, is expected to rise by 2 percent. The capacity to transact is also expected to increase, with net debt/EBITDA, our measure of capacity, showing an 11 percent improvement in 2018. Both these numbers are below the global average of 5 percent and 17 percent for predicted appetite and capacity respectively.

"I'm very bullish about 2018 for several reasons, particularly the ongoing drive for both competitive innovation and global conservation among many industrial companies looking to transform business models and dramatically improve their competitiveness and sustainability. The focus on technology and innovation will continue to drive M&A activity, including the hunt for new environmental technologies in heating, ventilation and insulation – anything to do with CO2 reduction and improved environmental impact," continues Danny.

The current year to the end of Q1 2018 supports this more positive outlook, with deal value soaring 92 percent to US$114 billion from US$59 billion in Q1 2017. While the number of deals in Q1 2018 was 14 percent lower at 946 versus 1,103 in Q1 2017.

M&A Predictor 2018 - 10 year Industrials trend chart

Source: Dealogic, KPMG analysis

Reviewing 2017

The sector generally met our expectations for a strong 2017 amid deal activity that included numerous cross-border and cross-continental deals. Total deal value rose to US$398 billion in 2017 from US$330 billion in 2016, while the number of 2017 deals rose to 4,351 from 3,960 in 2016. Average deal size also increased, to US$92 million from US$83 million.

Danny notes that the deal interest we witnessed in 2017 should remain particularly strong among Asian players, especially Japanese firms, with numerous global companies scouting the European landscape for businesses that are a fit or that can quickly deliver key technologies in the race to innovate and drive competitive advantage and growth.

"Look for the percentage of cross-border deals to increase," Danny concludes. "The world of business continues to become much more global as technology and the Internet dramatically expand the landscape for attractive growth opportunities. The playing field just keeps growing. We also expect private equity to keep playing a significant role in 2018, as businesses pursue critical funding for rapid but efficient innovation and transformation."

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