In this report, we review ClearRidge’s most active industry sectors and provide an outlook through Fall 2015. These 7 industries are also among the most active sectors that drive M&A Activity in Oklahoma and the Southern Midwest region:
iii. Construction and Engineering
iv. Energy: Oil and Gas
vi. Industrial Manufacturing
vii. Transportation, Logistics, Distribution
The Aerospace sector got off to a strong start in 2015. Forecasts are cautiously optimistic that activity among smaller and mid-tier suppliers will continue to drive transaction activity in Aerospace.
The outlook for Aerospace looks to improve amid optimism in commercial aerospace, and rising demand for business jet and aftermarket services, even as high valuations and an uncertain budget outlook have restrained merger and acquisition activity in this sector. MRO companies may see improvement in deal activity as robust aircraft utilization rates abound. Financial investors continue to invest in aerospace companies with the acquisition of high-quality assets with revenue streams, diversified customer bases and niche capabilities.
The first quarter saw significant declines in M&A deal volume in Chemicals, yet valuations were up. This quarter’s activity was impacted by factors such as high chemical valuations, oil price pressure, and uncertainties in demand. Future M&A activity will depend on how quickly these uncertainties clear. Chemical companies continue to carve out non-core or underperforming assets. There are expectations that the level of financial investor activity will remain at a similar level for the remainder of year 2015, with financial investors continuing to play an active role.
III. Construction and Engineering
Merger and Acquisition activity has slowed considerably in Construction & Engineering in the first quarter of 2015, relative to the near record transaction volume and value recorded in 2014. Q1 2015 was the slowest in the last 18 months, although it remained in line with the historical median. However, deal activity is forecast to pick up in the remainder of 2015 amid some volatility.
Consolidation among smaller, niche companies remains the dominant theme and the consolidation of mid-sized firms is forecast to increase as they scale up to compete on larger, more complex projects and build out capabilities. The industry continues a path toward full service integration and mid-size firms have the most to lose from inactivity. Financial buyers have become increasingly active and are investing in construction and building material companies. The skilled labor gap is emerging as a major theme as companies struggle to fill talent needs, particularly in skilled areas such as engineering and design. As companies look to invest in growth, talent considerations will become a more critical consideration in due diligence.
IV. Energy: Oil and Gas
There was a decrease in mergers and acquisitions in the Oil and Gas industry in the first quarter of 2015, compared to the fourth quarter of 2014, as the drop in oil prices continued to impact companies’ growth strategies. While the decrease in deal activity was consistent with first quarter historical trends, corporate deals surpassed asset transactions for the first time since 2010.
The declines in deal activity that were seen over the last two months of 2014, particularly in the upstream space, continued in the first quarter of 2015. The focus of the decline in oil prices has caused companies to focus internally on cost reduction and productivity enhancement activities. Total deal activity in the upstream segment dropped significantly in the first quarter, accounting for twelve transactions. The total number and value of oilfield services decreased to only three deals and the downstream deals remained the same at two.
Since the start of 2015, financial investors have been showing a strong interest in the oil and gas industry; in particular looking to acquire producing properties. There is also significant demand among oil and gas producers with a strong balance sheet (and strong financial backing) to pick up select producing assets from more leveraged companies who are working to reduce their debt load. Furthermore, we anticipate increased acquisition activity among service and manufacturing companies related to the oilfield. All in all, stronger companies in the oil and gas sector see 2015 as a real opportunity to acquire and build market share.
According to PwC, U.S. deal volume in healthcare was up 19% in Q1 2015, with deal value up 92%. Typically a slow and steady healthcare sector, Managed Care acquisitions took off in Q1, with 10 deals announced – the most active in three years and double Q1 2014’s activity. The Behavioral Health and Rehabilitation sectors both also showed strong activity compared to 2014. There were also 21 Physician Practice acquisitions in Q1 of 2015, compared to 13 a year ago.
There have been announcements of affiliations and joint ventures in some slower performing sectors (not recognized as M&A transactions for this report), which may explain reduced M&A activity in Home Health (-16%), Hospitals (-8%), and Labs, MRI & Dialysis (-67%).
Private Equity investment in healthcare was strong in Q1 with Walgreen’s Infusion Services (Madison Dearborn); Concentra (Select Medical – Welsh, Carson, Anderson, & Stowe); Sterigenics International (Warburg Pincus) and Air Medical Group (KKR).
VI. Industrial Manufacturing
The first quarter of 2015 was the strongest in four years. Consolidation among smaller, niche companies remained a dominant theme. Strategic, as well as financial investors, continue to pursue high quality industrial assets and are more willing to acquire companies with stable growth prospects, even at a higher valuation. Financial buyers with plenty of cash at their disposal have been highly active in deals involving diverse end markets such as packaging, metal components, turbines, and specialty transformers.
Analysts remain optimistic that deal activity in the industrial manufacturing sector will likely strengthen. The biggest hurdle for potential buyers is adjusting for long-term growth themes with near-term volatility. Companies are reevaluating growth opportunities in major markets as they digest both the direct and indirect economic implications of the rapid deterioration in oil prices and consider the potential impact of the first round of fiscal policy changes from the Federal Reserve.
VII. Transportation, Logistics, Distribution
Deal activity was mixed in the transportation and logistics sector in the first quarter, as transaction volume fell compared to the fourth quarter of 2014, while total transaction value and average deal value both gained, showing that while fewer deals were announced, the deals tended to be larger. In Q1 2015, deal activity was driven by the ground transportation and logistics industries, which accounted for 40 percent of the year’s activity. This was driven by an increase in passenger ground logistics, which drove 20 percent of the first quarter’s volume, compared to only 12 percent in 2014 overall. Trucking deals declined to 17 percent of activity.
Analysts remain optimistic for the rest of 2015. In addition to a strengthening the U.S. economy, there are also expectations that logistics transactions will continue to increase, driven by a desire among strategic investors to expand geographic reach and improve efficiencies through consolidation.
M&A across all Industry Sectors
As evidenced in this report, a decoupling continues between merger and acquisition activity across all sectors and a reversion to an independent M&A outlook industry by industry.
2015 is turning out to be another year where we speculate about the Federal Reserve’s action with interest rates and, in the meantime, abundant cash and credit is fueling acquisition activity. Until interest rates rise start to rise, cash earning negative returns and companies being encouraged to invest money in growth initiatives and acquisitions.
Seven years after the start of the financial crisis, companies have been changing their attitudes about the economy. The U.S. GDP forecast has been revised lower to 2.6% for the year, but that is off the back of a weak first quarter impacted by harsh winter weather, a strengthening U.S. dollar and declining investments in the oilfield. 280,000 jobs were added in May, the strongest since December and more people entered the labor force. Analysts predict that the unemployment will decline to 5.1% by the end of 2015, adding 2.8 million jobs this year.
Despite the prospect of an interest rate rise in September, few analysts forecast core inflation to reach 2% this year and the Federal Reserve will likely be cautious about raising rates too quickly and hurting the labor market.
A strong dollar is continuing to limit export growth, as imports remain cheaper and demand from European and Chinese economies is relatively weak. Durable goods orders were strong in March and April, with new orders for machinery surging 3.1% in April.
For the broader economy, depressed energy prices have not been a boon that many were anticipating for consumers and certain industries.
ClearRidge Perspective for 2015
ClearRidge deal opportunities continue to gain good visibility from industry strategic buyers and private equity groups, with the individual deal dynamics being the greatest determinant whether the buyer is a strategic, private equity or a blend of the two.
Pre-emptive company analysis and due diligence continues to be critical. Bolstering our standard business practice at ClearRidge, our team is working hard to remove obstacles to close transactions and ensure that only the most likely buyers with the capital and commitment to close a transaction make it to the closing table.
The most active buyers are demanding increasingly thorough and professionally prepared information, earlier in their review of each acquisition opportunity, including deep level transactional and financial analysis. Companies that are better prepared prior to the sale process have been rewarded with higher valuations, smoother and less intrusive pre-closing due diligence, and a quicker cycle to closing the transaction.
Sources: This report has been compiled from reports and research including federal data, independent analysis, IBISWorld, PricewaterhouseCoopers, Janes, CFA, Deloitte and other sources cited in the text.
Note: Unless otherwise stated, all deal data is for the United States only. In the report, you will see that some of the deal data is for larger public companies. The most reliable and timely data tends to be for the larger companies in each industry; however, deal activity of largest corporations is also a good barometer for M&A activity among midsized companies in the same industry.