Diversified Industrials Q3 2019

Diversified Industrials Q3 2019

M&A Transaction Trends

Largest Transactions Closed

  • Target
  • Buyer
  • Value($mm)

Source S&P Capital IQ as of 10/10/2019 and PCE Proprietary Data

M&A Industry Trends

Ongoing Trade War Continues to Hit Manufacturing Sectors

Business optimism took a hit in the third quarter due to concerns about the ongoing trade war, slowing global growth, geopolitical issues, and Brexit. The Institute for Supply Management’s Manufacturing (ISM) Index struck a 10-year low of 47.8 in September; manufacturers attributed the contraction to China-related supply chain shifts and exports hampered by the dollar’s strength. While ISM’s New Order Index rose slightly in September, new export orders for manufactured goods dropped for the third straight month. The Fed’s Industrial Production and Capacity Utilization also indicated a cooled pace of growth as industrial production and manufacturing edged up only 0.6% and 0.5%, respectively.1, 2, 3, 4

U.S. Tariff Hike Temporarily Delayed

A planned U.S. tariff hike of 5% set for October 15 on $250 billion of Chinese goods was just halted thanks to recent talks, as China promised to purchase $40-$50 billion of American agricultural products and reconsider intellectual property rights issues. China requires further discussions before sealing the deal on the first phase negotiations. Earlier in the quarter, a 10% tariff increase was levied on $300 billion worth of Chinese-manufactured consumer products, set to begin September 1. The Trump Administration then changed course, delaying tariffs on consumer electronics such as smartphones, video game consoles, and some clothing and toys until December to avoid a blow to consumers’ holiday spending. China retaliated with 5% to 10% tariffs on $75 billion of U.S. goods, plus a 25% tariff on U.S. cars and 5% on auto parts and components. As of September 2019, 82% of parts and supplies purchased from China by U.S. businesses are tariffed.5, 6, 7, 8

Oil Swings Back Due to Increased Supply

A major Saudi oil facility was attacked in a September drone strike, initially causing a 5% cut in world oil production. Hoping to capitalize on the resulting oil price spike, many producers sought to increase drilling; however, stockpiles of crude oil rose by 2.4 million barrels as of the second week of September, when key excess reserves were released. Increased supply is expected to push prices downward, providing relief to manufacturers. A jittery market saw prices rise again following a suspected attack on an Iranian oil tanker off the Saudi coast.9, 10, 11

Deere Sees Increased Sales, Yet Experiences Overall Profit Loss

Deere is rolling back its international operations, as developing markets have been slow to adopt the large farm equipment dominant in North America. The company states that while sales have increased 2% over the last three quarters, profits dropped 12% as a result of rising materials and factory expenses.12

Industrial Equipment Manufacturer to Acquire Milacron in $2 Billion Deal

Industrial equipment manufacturer Hillenbrand will buy plastics-processing equipment maker Milacron in a $2.0 billion deal. Hillenbrand sells equipment used across overlapping and complementary parts of the plastics value chain. Milacron now relies less on sales of capital-intensive machinery sensitive to business cycles and more on equipment that must be updated or replaced with every new product cycle. Revenue synergies from cross selling the companies’ complementary machinery and aftermarket services, plus cost savings of $50 million, are predicted.13, 14

Advanced Drainage Systems Acquires Infiltrator Water Technologies

Advanced Drainage Systems has acquired Infiltrator Water Technologies for $1.08 billion. ADS is a leading manufacturer of water management products and drainage solutions for the construction and infrastructure industries. Infiltrator primarily creates on-site water treatment solutions for residential use. The acquisition strengthens ADS’ water management product offerings while broadening its market. The water treatment business shares a similar business model to ADS’ water management business, allowing for the acquisition to be frictionless.15

Chart Industries Expands Into a New Market

Chart Industries Inc. has purchased Harsco Corp’s Industrial Air-X-Changers business for $592 million, providing Chart with air-cooled heat exchangers, which allows the company to expand into the compression market. The purchase strengthens Chart’s core competencies in the cryogenic engineering space for industrial gas and energy companies.16

United Auto Workers Strike Costing GM Millions

An estimated 46,000 United Auto Workers (UAW) across 55 factories walked out on September 16 after GM failed to address union demands. Analysts state the company is losing $25+ million a day, $113 million to date, translating to approximately 43,000 vehicles per week. The strike has led GM suppliers to temporarily halt GM-related projects, and have laid off nearly 10,000 non-UAW workers.17, 18

U.S. Lumber Industry Continues to Suffer in Light of China's Retaliatory Tariffs

Hurt by both volume and pricing drops, the U.S. lumber industry is taking hits after China, the top export market for U.S. hardwood, reduced orders and initiated retaliatory tariffs of up to 25% on lumber products imports. Lumber exports to China have dropped 40% this year with manufacturers struggling to make up for losses elsewhere, leading to layoffs, plant closures, and requests for government assistance, as hardwood prices also dropped 20% year-over-year in August. China is especially fond of U.S. higher furniture-grade lumber.19

Gold Prices on the Rise In Spite of Interest Rate Cuts

Gold prices, typically negatively correlated with interest rate cuts, have risen by 25% over the year. While prices increased, miners are moving cautiously regarding expansion and production increases. This lack of activity contrasts with the previous boom cycle, where overproduction and high debt negatively impacted the mining industry as prices eventually leveled off.20

Largest M&A Transactions Closed

Target Buyer Value($mm)
Pregis Corporation Warburg Pincus LLC $1,300.00
Infiltrator Water Technologies, LLC Advanced Drainage Systems, Inc. $1,080.00
Kaman Industrial Technologies Corporation Littlejohn & Co. LLC $700.00
Industrial Air-X-Changers Business of Harsco Corporation E&C FinFan, Inc. $592.00
Automated Packaging Systems, Inc. Sealed Air Corporation $510.00
All Assets of Elite Compression Services, LLC Archrock Services, L.P. $416.15
All of the Assets of Long Island Pipe Supply, Inc. Core & Main LP $225.00
Certain Assets of Orchids Paper Products Company Cascades Inc. $216.00
Franchise Operations of HSW RR, Inc. and Assets of Western Drain Supply, Inc. Roto-Rooter Services Company $120.00
Corenso Holdings Americ, Inc. Sonoco Products Company $110.00

Source S&P Capital IQ as of 10/10/2019 and PCE Proprietary Data

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Data Assumptions

This report represents transaction activity as mergers & acquisitions, consolidations, restructurings and spin-offs. Targets are defined as U.S. Based companies with either foreign or U.S. based buyers. Transaction information provided is based on closed dates only.

Glossary

EBIT - Earnings Before Interest and Taxes
EBITDA - Earnings Before Interest, Taxes, Depreciation, Amortization
LTM - Last Twelve Months
TEV - Total Enterprise Value

Sources:

  1. Chaney, Sarah, and Andrew Restuccia, “U.S. Factory Activity Shrinks for First Time in 3 Years,” The Wall Street Journal, 3 September 2019.
  2. Institute for Supply Management, August 2019 Manufacturing ISM® Report On Business®, 2019.
  3. Federal Reserve (2019). Federal Reserve Statistical Release. Retrieved from Federal Reserve Website.
  4. Omeokwe, Amara; Hannon, Paul and Hufford, Austen, “Slowing Trade Hits Global Manufacturing,” Wall Street Journal, October 2, 2019.
  5. Mauldin, William, and Salama, Vivian, “Trump Threatens New Chinese Tariffs, Rattling Investors Across Markets” The Wall Street Journal, 1 August 2019.
  6. Lovely, Mary E. “Many Americans haven't felt the burden of Trump's tariffs. They're about to,” CNN Business, October 2, 2019.
  7. Qi, Liyan, Zhu, Grace and Zhu, Lin “China’s U.S. Exports Tumble as Tariffs Bite,” WSJ, October 14, 2019.
  8. Imbert, Fred, “China wants another round of talks before signing phase one of the trade deal, CNBC, October 14, 2019.
  9. Ramkumar, Amrith, and Ira Iosebashvili, “Oil's Swings Reinforce Saudi Arabia's Key Role in Energy Markets,” The Wall Street Journal, 17 September 2019.
  10. Dezember, Ryan, “Saudi Oil Attacks Could End Natural-Gas Rally,” The Wall Street Journal, 20 September 2019.
  11. Toy, Sarah, “Fresh Worries About Excess Supply Drive Down Oil,” The Wall Street Journal, 25 September 2019.
  12. Tita, Bob. “Deere Turns to U.S. After Growth Stalls Overseas.” The Wall Street Journal, 22 September 2019.
  13. “Industrial Equipment Maker Hillenbrand to Buy Milacron in $2 Billion Deal,” Thomson Reuters, 12 July 2019.
  14. Jasinksi, Nicholas, Weighing Hillenbrand’s Deal to Acquire Milacron,” Barron’s, July 12, 2019.
  15. “Advanced Drainage Systems Acquires Infiltrator Water Technologies From Ontario Teachers' Pension Plan.” MarketWatch, 1 Aug. 2019.
  16. “Chart Industries Acquires Harsco Air-X-Changers.” Process Cooling RSS, Process Cooling, 1 July 2019.
  17. Thibodeau, Ian. “Lengthening UAW-GM Strikes Weighs on Suppliers, Sparking Layoffs,” Detroit News, The Detroit News, 25 September 2019.
  18. LaReau, Jamie L., “UAW Rejects GM’s Latest Offer,” Detroit Free Press, October 1, 2019.
  19. Hufford, Austen. “'It's a Crisis'; Lumber Mills Slash Jobs as Trade War Cuts Deep,” The Wall Street Journal, 26 September 2019.
  20. MacDonald, Alistair, “As Gold Prices Heat Up, Miners Play It Cool,” The Wall Street Journal, 22 September 2019.
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