M&A activity in the composites industry
Michael Del Pero (FocalPoint Partners LLC, Los Angeles, Calif.) comments on the uptick in mergers and acquisitions activity in the recovering advanced composites segment.
The end of 2010 witnessed merger and acquisition (M&A) activity reminiscent of the height of the market in 2007. Despite concerns that deal activity might flatten out in 2011, the M&A freight train rolled through the New Year and headed into the second quarter at full speed. After three years on the sidelines, corporate America is starting to chip away at the $1.5 trillion (USD) in cash that accumulated as companies spent the majority of their efforts on cost-cutting and “right-sizing” their businesses. Similarly, private equity investors are sitting on a record $500 billion in capital that must be invested to justify additional fundraising activity. What corporations and investors both know is this: To grow, you must invest.
These factors are the primary drivers of dealmaking in the composites industry today. Through the end of the first quarter, ~25 acquisitions and financing transactions were announced, involving composites and advanced-materials companies. These include several high-profile deals, such as Warren Buffett-backed Berkshire Hathaway’s (Omaha, Neb.) $9 billion takeover of publicly held Lubrizol Corp. (Wickliffe, Ohio), and Cytec’s (Tempe, Ariz.) long-anticipated divestiture of its noncore building block materials business to private equity group H.I.G. Capital for $180 million. As headline-worthy as these deals have been, the real story is the strategies that have driven them.
It comes as no surprise that aerospace continues to be an area of strategic growth. M&A interest in aerospace composites is particularly high. Despite the high interest, we don’t anticipate as many M&A transactions in the aerospace segment as one might expect. This isn’t due to lack of either acquisitive interest or available funding. In fact, strategic and private equity-backed aerospace companies approach my firm almost daily, seeking aggressively to acquire assets with composites capabilities in both material technologies and component fabrication. The inhibiting factor is that few targets currently meet the size criteria of acquirers that need to deploy meaningful amounts of capital. This should be an indicator for any scalable aerospace composites player who is entertaining an exit in the near future. There will be high interest expressed by acquirers who are willing to pay a “scarcity premium” for a competitively differentiating opportunity.
We do expect to see healthy deal activity in composites, particularly in construction and building products. For the most part, acquirers have concluded that the bottom has been reached in these markets and that there is an opportunity to invest ahead of the full recovery. A good example of this trend is building products manufacturer and distributor Gibraltar Industries’ (Buffalo, N.Y.) pending acquisition of private equity-backed D.S. Brown (North Baltimore, Ohio) for ~$100 million. H.I.G. Capital’s (New York, N.Y.) refinancing of composite building products manufacturer Advanced Environmental Recycling Technology (AERT, Springdale, Ark.) is another. Although acquirers are unwilling to completely ignore the financial downturn that affected most composite building product companies in 2009-2010, they seem willing to structure transactions creatively, thus giving sellers some upside credit for anticipated growth in 2011. We also expect to see increased deal activity in the automotive sector as composite applications continue to play an increasing role.
In several recent cases, parties on both sides of the deal have been indicative of noteworthy M&A trends. The majority of recent deals we have seen involved either corporate-to-corporate plays or private equity-backed transactions. These “smart money” players are generally more strategically and opportunistically motivated than many privately held businesses; they are intent on timing the market and achieving maximum valuation. There appears to be a considerable disconnect between acquirers who are flush with cash and looking to deploy capital now and sellers who hope that market valuations will recover and grow to new peak levels over time. The risk here is that the capital available today might not be available if and when the market fully recovers two or three years from now. Those with money want to invest now and will find the best opportunities available to support their growth today.
Another factor seems to be unique to companies in this industry. Many do not regularly employ experts who bring professional and strategic guidance to their growth objectives. Our experience is that companies that enlist the services of an investment banker or advisor, just as they would an accountant or attorney, tend to have more successful M&A and overall growth strategies. Even when a company is not considering immediate action, it is prudent to have an advisor on hand to act as a sounding board for strategic decision-making purposes and help them stay close to opportunistic situations in the market.