We are in the first quarter of 2017 and deal data is now available through the end of the fourth quarter for full year 2016. In this report, we review our region’s most active industry sectors and give an outlook for 2017.
Analysis by Sector
These 8 industries are also among the most active sectors that drive M&A Activity in our region:
i. Aerospace
ii. Chemicals
iii. Construction and Engineering
iv. Energy: Oil and Gas
v. Healthcare
vi. Manufacturing
vii. Transportation, Logistics, Distribution
viii. Telecommunications
Outlook across all sectors and the macro drivers of M&A in 2017
Partisan politics aside, the new Trump administration has had most political commentators forecasting a growing economy, none more so than President Trump himself, who is targeting 4% U.S. GDP growth. Economic forecasters are predicting close to 2.1% for 2017, although recent activity in the markets may point to a little too much optimism. Proposed tax cuts won’t be effective until later in 2017 or perhaps 2018, but they would be the most significant short-term driver for the economy. History shows that initial consumer tax cuts go to paying down debt and only later to increased spending. President Trump’s infrastructure spending is likely 12 months out, with many more months of planning and permitting before the funding can begin to flow. Those two, however, give long-term encouragement to the future of the economy.
Headwinds for the U.S. economy in 2017 include rising interest rates, but positive consumer spending, employment and wage gains should more than compensate for rising rates.
Employees are likely to see wage rises between 0.7% and 4.5% depending on industry and performance, with average forecasts for wage growth around 3% in 2017. Employment surged in January and February, rising 238,000 and 235,000 respectively. Unemployed people are also coming back into the job market. The unemployment rate declined to 4.7%. Job growth was greatest in healthcare business services, food services and construction.
The Federal Reserve raised rates by 0.25% at its March 15th meeting, fueled by positive jobs and inflation data. Two more 0.25% rate hikes are forecast for this year, likely in June and September or December. If the economy remains on a positive track, the fed is looking to raise rates to 3% by 2019 (another 6 quarter point rate rises in 2018 and 2019). By the end of this year, the 10-year U.S. Treasury is forecast to rise to 3.0%.
The U.S. dollar is strong and is likely to remain strong due to interest rate rises and a strong economy.
Business spending was flat in 2016, depressed by a strong dollar’s impact on exports, as well as overstocked inventories. However, 2017 business spending on durable goods is forecast to rise by 3-4% in 2017.
Retail sales are rising, on the back of the strongest consumer confidence data in ten years, with 2016 retail sales gaining 3.8% in 2016 and forecast to grow in 2017, by 4.2%. The consumer remains the strongest driver of the U.S. economy.
M&A Transaction Report and Outlook by Sector
I. Aerospace
Aerospace deal activity declined in the fourth quarter of 2016, compared to a year earlier; both volume and value of deals. Mergers and acquisitions activity for full year 2016 was 22% lower than 2015. Total deal value and average deal size declined 43% and 27% respectively. However, deal activity was up 73% from the third quarter, an indication of positive momentum into early 2017.
Aircraft and parts led the way, fueled by Rockwell Collins’ acquisition of B/E Aerospace. Aircraft and parts accounted for 33% of deal value in the sector in 2016.
Aerospace software and security systems also showed strength, as well as MRO and Logistics, Components and Subsystems and Machined and Cast Parts.
Public company aerospace valuations are up since the US election, several posting record high valuations, which has a trickle-down impact on private company valuations.
II. Chemicals
Chemicals ended 2016 positively, with fourth quarter posting deal value 128% higher than Q3. The number of closed transactions (38) in Q4 2016 was also up 52% over the previous quarter. For full year 2016, Chemicals mergers and acquisitions value was up 39% year-over-year.
A significant shift from 2015 to 2016 was the number of cross-border mergers and acquisitions; 24% of deal value in 2015 compared to 78% in 2016.
One sub-sector that has slowed down from previous high activity was fertilizers and agricultural chemicals, which had been experiencing premiums in recent years due to previous volatility in feedstock prices. Industrial gases instead led mergers and acquisitions activity in Q4 2016.
III. Construction and Engineering
The Construction and Engineering industry posted 2016 mergers and acquisition activity just 4% lower than 2015 in terms of total deal value, but 23% higher in the number of deals closed.
Q4 2016 was the fourth straight quarter with increasing deal volume, posting 18% more deals than Q3 2016.
Construction machinery and materials manufacturing led the way with the highest number of deals of any sub-sectors; 30% of all deals. Quikrete’s $950 million acquisition of Contech was the banner deal in the sub-sector.
The outlook for 2017 and 2018 is bolstered by political will for infrastructure spending and tax reform, both fueling engineering and construction spending, as well as interest in acquisitions in this space. So far, early signs for 2017 also show a robust U.S. economy.
Private equity remained active in this industry in 2016, while strategic investors accounted for only 59% of transaction volume.
There continue to be concerns about a labor shortage which, combined with rising wages in this sector, may be a headwind for the coming year.
One small, but growing sub-sector is precast concrete manufacturing, which continues to outpace most other sub-sectors, driven by growth in government funding for infrastructure projects, increasing utility construction, as well as commercial construction demand growth.
IV. Energy: Oil and Gas
2016 was a year of steady progression for oil and gas mergers and acquisitions activity. Capital markets improved last year for energy deals as commodity prices began their recovery in early 2016. This improvement continued through the second, third and fourth quarters of 2016. In Q4, many industry participants also saw the election of President Trump as a more favorable political environment for the oil and gas industry.
Fundamentals also improved during the past few quarters, as prices were rising on top of significant productivity gains realized during the downturn.
By the fourth quarter of 2016, deal volumes were up 30% over the previous quarter and up 45% year-over-year, with transaction value up 168% over the same quarter a year earlier.
Upstream mergers and acquisitions activity led the way with deal value and volumes up 111% and 53% in 2016 respectively compared to 2015.
Around half of all deals in the fourth quarter were related to shale plays, in particular the Permian and Marcellus basins.
Midstream deal activity was lower for most of 2016, but three megadeals in the fourth quarter reversed this trend and resulted in deal values almost doubling over 2015.
For 2017, the tailwinds of 2016 are expected to continue driving mergers and acquisitions activity in oil and gas.
Mergers and acquisitions activity in the oilfield services sector pushed higher in the fourth quarter of 2016. The headline General Electric – Baker Hughes merger is expected to fuel further transaction activity in the services sector.
Another barometer pointing to investor confidence in the sector was the IPO market: Extraction, Mammoth Energy and Wildhorse Resources were three successful IPOs in the fourth quarter and the first IPOs in the industry in two years.
V. Healthcare
The number of Healthcare merger and acquisition transactions remained stable in 2016, with 939 deals compared to 952 in 2015. However, deal value was down in 2016 due to a slew of megadeals in the Managed Care sub-sector in Q3 2015 that skewed 2015 deal data. Overall, healthcare mergers and acquisitions remain healthy heading into 2017. Q4 2016 deal volume was up over Q3 and value was up 35% over Q4 2015.
The most active sub-sector in 2016 was long-term care, with 36% of all healthcare deal volume and 20% of healthcare deal value. Hospitals represented the second most active subsector with 19% of deal value. The fastest growing subsector was Physician Medical Groups with 385% increase in deal value, while rehabilitation grew 21% in number of transactions.
A significant driver for 2017 mergers and acquisitions deal volume is the growth in the aging population, with an anticipated growth in home-based services. Healthcare consolidations and expansions continue to play a major role in healthcare M&A as companies use acquisitions to grow revenue and further cover their infrastructure costs. A key technology trend is the increase in 3D printing in healthcare, which is used to produce low-cost, patient-specific prosthetics, organs, implants, costs and even skin for burn victims. Technology spending in healthcare continues to be a focus.
VI. Manufacturing
Despite a slow start to 2016, the second half of the year posted strong gains in the number of manufacturing mergers and acquisitions transactions. The first half of 2016 had been depressed by slowing growth in China; consequential effects of the Brexit vote, as well as uncertainty surrounding the election. For the full year, deal value declined 3% compared to 2015 and the number of deals declined by 18%, from 274 to 226 transactions.
The biggest manufacturing deal of the year was the Johnson Controls/Tyco megadeal, which closed in Q1 2016.
The most active (and only growing) sub-sector was industrial machinery manufacturing, which accounted for 41% of all deal activity in the manufacturing industry and 59% of deal value. For full year 2016 the industrial machinery sub-sector posted 6% higher deal value compared to 2015 and doubled in Q4 compared to Q3.
The outlook for mergers and acquisitions activity in this space is positive for 2017, with momentum from the third and fourth quarter fueling transaction activity and value. Dealmakers are attracted by the prospect of reduced tax rates, reduced regulations, healthcare reform and infrastructure investment.
VII. Telecommunications
2016 telecom mergers and acquisitions had some significant transactions, the largest of which was the proposed acquisition of Time Warner by AT&T and despite being a campaign trail talking point, most expect this deal to go through, having already passed the scrutiny of the FCC.
Verizon is looking to close on the acquisition of Yahoo, principally to buy content. Verizon also gained FCC approval for the acquisition of XO Communications, acquiring the carrier’s spectrum license to support Verizon’s push into 5G. Smaller Verizon 2016 transactions included Sensitivity and Fleetmatics.
Centurylink was active in 2016, gaining scale in the enterprise market, with their planned merger with Level 3 Communications. Centrylink also acquired netAura for managed security services and ElasticBox for application management. With a similar rationale for the enterprise market, Windstream is looking to acquire Earthlink. Consolidated Communications was active in late 2016, with their agreement to buy Fairpoint, in addition to their February 2016 acquisition of Champaign Telephone Company.
Private equity is active in the telecom space, rolling up telecom providers in different regions across the country.
Positive news in the wireless space is the judge’s ruling and progress in the FirstNet award, whereby AT&T will be awarded the 25-year deal to build and maintain the nationwide public safety broadband network.
VIII. Transportation, Logistics, Distribution
Transportation, logistics and distribution posted slightly lower deal volume in 2016 compared to 2015, only a 6% decline, but 22% lower value in the second half of 2016 compared to the first half.
Trucking led the way in 2016, contributing the highest value of deals, with average deal size up 141% over 2015. Conversely, the shipping industry continues to face challenges but is also generating investment and deal opportunities, as investors pick up stressed assets.
The outlook for 2017 and beyond is uncertain, with continuing competitive pressures. Freight and delivery companies are increasingly expected to provide faster delivery, better customer service and weekend delivery at lower costs, while also providing near real-time tracking. However, last mile deliver is highly fragmented, and many providers need to make investments in technology to improve speed and provide end-to-end visibility. Truck driver shortages also are affecting the last-mile market, as drivers not only need to be qualified, but also have customer relationship skills.
ClearRidge Perspective for 2017
Pre-emptive company analysis and due diligence continues to be critical for any business considering a sale. Business owners that focus time on due diligence before talking to a prospective buyer are rewarded with a higher purchase price and a greater chance of closing their deal at the terms they negotiated.
Strategic and financial buyers need to see professionally prepared information, including business and financial data from with the business to allow them to rationalize a premium purchase price and validate their business case for the acquisition.
How Can ClearRidge Help You Sell Your Business?
Clients trust ClearRidge to deliver a confidential and discrete preparation and sale process, to remove obstacles to close a transaction and ensure only the best prospective buyers make it to the closing table, with the capital and commitment to close a transaction. The ultimate goal is a higher sale price and preferential deal terms.
ClearRidge is the most active M&A advisory firm in our region and has been recognized for the quality of our work and success at managing and arranging transactions for our clients’ companies. For further information on our team, industry expertise and transactions history, please visit www.ClearRidgeCapital.com.
Sources: This report has been compiled from reports and research including federal data, independent analysis, Reuters, CFA, Janes Capital Partners Sources, PCE-Companies, Kiplinger, Mergermarket, PricewaterhouseCoopers, and SDR Ventures.
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.
