Industrials sector comment – November 2009

Date

Prophecies, Predictions, and Promises

As someone sensible once said, you should avoid making predictions, especially about the future. As we come to the end of a year that for many has seen the poorest trading conditions in recent memory and left the balance sheets of even our largest businesses in need of significant financial repair, you would have thought that only the criminally insane or paid economist (spot the difference) would attempt to predict what 2010 may have in store for M&A. However in the IP&S team here at Clearwater it has become a bit of a year end tradition to put reputations (and small wagers) on the line and second guess the coming market. Let us know if you strongly agree / disagree with our views.

Volumes will increase – OK, hardly rocket science here, but let’s consider the drivers. Corporate balance sheets are repaired, and kitchen sinks have been provided for. That leaves next year’s problem mainly around the P&L account. With stronger balance sheets, corporate sellers of assets will not feel like distressed sellers, encouraging more non-core disposals. Stronger balance sheets also mean more confident buyers. A weakened £ means predatory overseas buyers. Whilst private equity will continue to ponder, there is investor money out there so more MBOs. It won’t be a vintage year, but it will be better than 2009. Prices are unlikely to show real improvement, but as lower asset prices are likely to be a longer term phenomenon this should actually help increase deal flow as the perceived value gap between buyers and sellers diminishes.

And private businesses? The Pre-Budget Report has opened a window of opportunity for tax efficient business sales. No mention by the Chancellor yet of the widely anticipated increase in capital gains tax, but the consensus is this is just a matter of timing. With rates expected by some to hit 35-40% (currently 18%) there is a strong tax benefit for an exit sooner than later. Obviously the tax tail shouldn’t wag the deal dog, but if trading for these businesses holds up expect a sudden surge in attractive business sales next year.

So that is our big picture view. We will cover our IP&S specific sector predictions next time. In the meantime may we wish you and your families a happy and peaceful break over the Christmas period, and the very best for 2010.

Deals

Daimler AG has acquired a 75.1% stake in Brawn GP Ltd. Daimler has completed the transaction with support of its largest shareholder, Aabar Investments of Abu Dhabi, and at the same time has sold its 40% stake in McLaren Group Ltd.

Carrier Corp has acquired the DMS Controls division of i2S Group Ltd. The US supplier of air conditioning, heating and ventilation equipment, a subsidiary of United Technologies Corp, has acquired DMS Controls in order to expand its integrated building control systems for commercial office buildings and data centres.

Electronic Motion Systems UK Ltd has been the subject of a management buy-out from Gores Group LLC. The Welsh Assembly Government has backed the MBO of the Welsh manufacturer of electronic components for the automotive industry.

Chloride Group plc has acquired Emergency Power Systems plc, a designer and manufacturer of stand-by power equipment. EPS specialises in power solutions for mission critical applications in the defence, healthcare, local Government, oil and gas, railway and retail industries.

Rotork plc has acquired Flow-Quip Controls Inc, a US distributor of valves, valve actuators, controls, instrumentation and environmental equipment for the petrochemical, pipeline, power generation, refining, water and waste industries. The business will be integrated into Rotork’s Fluid Systems division.

Eco Concept Ltd has acquired LDV Ltd, the van manufacturer from the group’s administrator. Shanghai Automotive Industry Corp is thought to be among the Asian automotive groups supporting Eco Concept’s acquisition of LDV which as been valued at between £6m and £8m.

Orolia SA has acquired McMurdo Ltd, a manufacturer of navigation and safety equipment for air, land and marine applications. The acquisition strengthens Harsco’s position in the UK industrials sector by adding additional capabilities in cladding, industrial painting, site cleaning and thermal insulation to Harsco’s existing expertise in scaffolding.

Paradigm Oilfield Services Ltd has acquired the down-hole oil tool rentals business of Stable Holdings Ltd. Stable is a manufacturer of down-hole tools for the oil and gas industry which is in administration.

Bland Group Ltd has acquired Universal Engineering Ltd, a manufacturer of armoured vehicles. Bland is a specialist industrial investment group based in Gibraltar.

Watts of Lydney Group Ltd has sold its Watts Industrial Tyres division to a management buy-out. Watts Industrial Tyres specialises in tyres used in materials handling applications.