Mergers & Acquisitions in the Global Valves Industry – March 2008

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The first few months of 2008 have raised important issues for mergers and acquisitions in the valves industry. With growth levels in many Western economies forecast to be lower this year, there is widely expected to be a knock-on effect on both the volume and value of M&A deals across many industries.
The valves industry, however, has yet to see the drop in the volume of deals that has been observed in other sectors which far greater exposure to credit-driven expenditure. The key reason for this is that the fundamentals for valve companies remain sound. There is still strong demand from customers in numerous end-user markets whose own businesses continue to enjoy strong growth. Those with exposure to the aerospace, bio-energy, defence, food processing, industrial gas, liquid natural gas, nuclear, oil and gas, petrochemical processing, pharmaceutical, power generation, refining, waste-water and water industries are all benefiting from market dynamics that are less exposed to the macro-economics issues which are directly impacting on other industries.
The valves industry is also seeing a number of other positive factors that will continue to underpin M&A activity through 2008. Many companies are continuing to see strong demand from the emerging economies, with the BRIC countries (Brazil, Russia, China and India) demonstrating particularly high demand as they invest heavily in their own infrastructure. The knock-on effect on many players in Western economies is that they must rapidly seek new capacity in order to meet this growing demand. At the same time others are still searching for ways of accelerating their product development initiatives by acquiring niche companies with particular expertise in specialist product areas. Therefore, whilst there is also some evidence of slight downward pressure on the multiples being paid for acquisitions, this is largely being confined to the larger deals where sizeable debt packages at historically high multiples are less available than in previous years.
A careful assessment of the deals that completed in the last quarter of 2007 and the start of 2008 is that small and mid-sized companies in the industry continue to prove attractive. At the same time, large multinationals are still sitting on sizeable acquisition war chests which they intend to deploy in the next 12-18 months.
A key indicator of the health of the M&A market is always the level of cross border transactions taking place. Acquiring a company in a new geography requires a number of additional factors to be taken into account including cultural, employment, local management and taxation issues. These additional complexities often tend to dissuade purchasers when they are also experiencing difficulties in arranging the finance for acquisitions. Yet, the valves industry has seen no let-up in cross border transactions which bodes well for the remainder of 2008.
A perfect example is the acquisition of Georgia Hydraulic Cylinders Inc by Ponar Wadowice Group SA, the Polish manufacturer of power hydraulic products such as control valves, filters, hydraulic accumulators, hydraulic cylinders, hydraulic pumps, pressure switches and shut-off valves. Georgia Hydraulic Cylinders is a US manufacturer of custom and standard hydraulic cylinders for a range of applications. Ponar Wadowice has initially invested $14m in the company in order to acquire a 50.5% stake and obtain a presence in the important US market.
Ponar Wadowice is also contemplating a spin-off its hydraulics division via an IPO later this year. It would consider using the proceeds for further overseas acquisitions as part of its strategy of growing its revenues to in excess of $200m.
The fact that financial purchasers are continuing to invest in the valves industry is another key factor that will support M&A valuations this year. The secondary buyout of VAG Armaturen GmbH, a German designer and manufacturer of industrial valves and fittings for the waste water and water industries, shows the strong attraction that financial investors have for businesses in the sector. Halder Beteiligungsberatung, a German private equity firm, has backed the $230m deal for VAG in which the management of the company have increased their stake as a sign of their ongoing commitment to VAG’s strategy. The transaction provided an exit for Equita Management and represents Halder’s ninth investment from its 2005 German fund.
VAG’s intends to focus on expanding its global distribution network for its products which are used in the sourcing, distribution, storage and supply of fresh and waste water. The Group intends to supports these developments with a significant investment in its domestic operations, as well its production sites in China, the Czech Republic and India.
Meanwhile, North American players continue to make both domestic and overseas acquisitions. Industrial Controls Distributors LLC, a US distributor of controls and solutions for commercial HVAC, process control and industrial automation applications, has acquired Piedmont Instruments & Controls Inc, for an undisclosed sum. Piedmont is a US distributor of analytical instruments, calibration equipment, instrumentation and valves for a range of industries. The deal will allow Industrial Controls Distributors to expand its inventory which already includes products from Dresser, GE Fanuc, Honeywell, Invensys, Johnson Controls, Siemens and Tyco.
A transaction of a different scale has seen GE’s Oil & Gas division acquire the Hydril Pressure Control (HPC) division of Tenaris SA, the Argentine pipe manufacturer, for an undisclosed sum. Hydril Pressure Control is a supplier of pressure control equipment used in the oil and gas drilling industry. It also offers a range of aftermarket field services for the maintenance of its installed base of products. GE Oil & Gas, which has an active acquisition programme, was particularly attracted to HPC’s focus on deep and ultra-deepwater applications. The acquired business will fit alongside VetcoGray’s expertise in these areas and accelerate GE Oil & Gas’ presence in the fast growing deepwater drilling sector.
For more information on mergers and acquisitions activity in the valve industry, contact Constantine Biller our industrial product analyst who hs unparalleled links to corporate decision-makers in the worldwide flow technologies and valves industry.

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