As the UK faced up to the prospect of soaring energy prices last year, manufacturing was forecast to be one of the industries worst affected. Manufacturers are, inherently, highly energy intensive businesses and the huge increases in oil and gas prices that have followed Russia’s invasion of Ukraine left many owners and industry observers fearing a wave of insolvencies – with some characterising the issue as “another nail in the coffin” of UK manufacturing.
The government’s six-month business energy price cap has helped to postpone the worst effects of rising prices, but this is now being scaled back significantly, meaning that the issue remains a pressing one for manufacturers across the UK.
However, an interesting trend that has emerged over the past year is a significant increase in M&A activity in the UK manufacturing industry – suggesting that the sector has perhaps proved more resilient than the worst-case scenarios warned, that it remains an attractive investment target for outside buyers and that some owners are potentially using dealmaking as a means of guarding against the prevailing headwinds.
With the threat of further energy price increases looming, however – as well as an array of other adverse factors, including rising prices for labour and raw materials, ongoing supply chain disruption and general domestic and global economic uncertainty – the question is whether dealmaking will continue in the sector throughout the remainder of 2023 and beyond.
Manufacturing M&A 2022
While 2022 saw the UK’s manufacturing industry confronting a wide array of headwinds – with many still recovering from the seismic impact of COVID-19 – numerous studies have demonstrated that the year was a bumper one for M&A activity in the sector.
According to a survey of the industry by BDO, there were 793 M&A deals involving UK manufacturers during 2022, up from 779 in 2021 and 595 in 2020. While the sharp increase from 2020, when dealmaking was largely derailed by COVID-19, is to be expected, the fact that activity also increased compared to 2021 (a year defined by a surge in pent-up dealmaking appetite and activity across many sectors) demonstrates the strength of M&A appetite in the UK manufacturing industry.
BDO’s key findings were that a large chunk of activity was driven by private equity – with one in five deals being private equity-backed buyouts. This is telling, as private equity firms are typically not prone to investing heavily in struggling sectors or targeting distressed acquisitions – suggesting that the sector is viewed as resilient, as well as profitable, by investors.
In a separate study, law firm Irwin Mitchell analysed data from Experian Market IQ and found that M&A activity involving UK manufacturing firms reached its highest level since 2016 during 2022. The report tracked a total of 1,344 transactions involving UK manufacturing businesses. Again, this represented an increase on both 2021 (1,285 deals) and 2020 (1,231).
As with the BDO survey, Irwin Mitchell’s report also spoke to the resilience of the manufacturing sector and how attractive it remains to investors. 57 per cent of the deals tracked during 2022 were straightforward acquisitions and 4 per cent were management buyouts (MBOs). 22.6 per cent, meanwhile, involved venture capital or private equity investment.
One statistic that did reflect problems facing the sector (and the broader UK) is that 30 per cent of deals during 2022 involved an overseas buyer. As has been seen in many other sectors, buyers from the US were the most active (8 per cent), as American investors took advantage of the dollar’s strength against the weak sterling and businesses for sale at generally lower multiples.
However, only a small fraction of these US-driven deals are likely to have been of a distressed nature, as illustrated by another telling statistic from the Irwin Mitchell report. During 2022, just 1 per cent of deals were restructuring transactions, a significant decline from 2021 when restructuring deals comprised 9 per cent of the year’s total.
Irwin Mitchell corporate partner Emma Callow commented on the findings: “This latest analysis may look surprising bearing in mind the challenges faced by the economy last year and although activity dipped in the last quarter of 2022, these figures certainly reflect how resilient the manufacturing sector is. It’s clear that UK manufacturers are highly attractive to overseas buyers and also venture capital.”
What trends are driving M&A activity
Companies in the UK manufacturing sector are facing a broad and growing array of headwinds, with disruption continuing to blight supply chains, operations impacted by rising energy costs, workforces hit by efficiency problems and a worsening skills gap.
Amid these issues, the major solution that many are turning to is technological and digital innovation, as they seek to harness the power of technology to improve efficiency, unlock cost savings and strengthen their resilience to further adverse conditions. This has resulted in an uptick in investment into things such as digitalisation and automation, with industry incumbents using M&A activity to bolster their digital capabilities, acquire tech-enabled firms and access innovative solutions to emerging headwinds.
A Make UK Digital Adoption survey cited by BDO demonstrates the benefits that investments in digitalisation can deliver for manufacturing firms in terms of resilience, efficiency and data collection. The survey revealed that over two-thirds of firms polled that had invested in digital technologies said that the investment had paid dividends, leaving them better placed to cope with economic headwinds.
One of the major benefits of digitalisation and investment in technology such as automation is that companies become more advanced in terms of collecting data, particularly if they have invested in technologies like machine learning and AI. Gathering data on operations, production and supply chain can help drive efficiencies that can improve profitability and generate a competitive advantage.
Digitalisation has also helped to increase M&A activity in the manufacturing sector by attracting investment from venture capital and private equity firms. As noted by BDO, areas of the industry such as automated industrial manufacturing offer high growth potential, recurring revenues, strong and secure order books and IP ownership, which is attracting investors keen on funding buy and build acquisition strategies in the rapidly growing market.
As technology continues to advance and grow ever more important to businesses throughout the manufacturing industry, the prominence of tech, digitalisation and automation in manufacturing M&A activity will only increase.
In early 2022, Indian industrial conglomerate Reliance Industries completed the acquisition of 100% of UK startup Faradion, a firm developing sodium-ion batteries, for £100 million. Sodium-ion batteries are widely viewed as an attractive alternative to lithium-ion batteries, being safer and around 30 per cent cheaper.
Despite their lower energy density compared to lithium-ion batteries, Reliance viewed Faradion’s products as having potential for both vehicles and renewable power storage and pledged to invest £25 million to accelerate the commercialisation of the company’s products.
Faradion said at the time of the acquisition that it had a wide-range of patents relating to sodium-ion batteries, including eight covering cell infrastructure, cell material and safety and transportation.
Following the acquisition, Reliance aimed to produce sodium-ion batteries using Faradion’s technology in India, with further global expansion targeted.
In a press release, Reliance chairman Mukesh Ambani said: “We will work with Faradion management and accelerate its plans to commercialize the technology through building integrated and end-to-end giga scale manufacturing in India.”
Faradion CEO James Quinn added: “Together with Reliance, Faradion can bring British innovation to India and globally, as the world increasingly looks beyond lithium.”
ESG and Net Zero
Manufacturing is one of the industries under the most pressure to improve its environmental performance and reduce emissions. Many major firms, which have the capital to expend on emissions reduction schemes and ESG-related investments, have already committed to achieving net zero by 2050.
As well as increasing ESG and sustainability-driven investments and deals among bigger firms, this has also produced downward pressure on mid-size and smaller firms to improve their ESG and sustainability in order to attract investment and not get left behind.
This has had a considerable impact on M&A activity within the sector and, as with technological advancement and digitalisation, its importance as a driver of dealmaking activity is only likely to continue growing over the coming months and years.
On the one hand, ESG and sustainability encourage industry incumbents to make deals that boost their credentials and capabilities, with acquisitions of innovative firms in areas such as the circular economy and emissions reduction enabling manufacturing firms to stay on top of emerging industry trends.
Similarly, as bigger companies work towards achieving net zero and face increasing regulatory pressure to do so, acquisitions of smaller businesses will enable them to gain the innovative technologies that will help them to achieve their aims and improve their reporting capabilities.
However, arguably the biggest driver of M&A activity from this perspective will be private equity or venture capital financing. ESG-related deals are increasingly a priority for such investors and this will help acquisitive companies with strong green credentials secure the funds that can help them ramp up their acquisition strategies, as well as serving as an incentive for others to improve their ESG credentials in the hopes of attracting such investment.
As mentioned with regards to technology, supply chain disruption is a major driver of M&A activity within the manufacturing sector, with logistics and supply chain technology and automation helping manufacturers to work around the issues that have plagued UK businesses ever since Brexit.
Aside from supply chain tech investments, however, supply chain disruption has also prompted another dealmaking trend within the manufacturing sector: nearshoring and onshoring, I.e., companies making acquisitions that move key operations closer to their central operations, either to a neighbouring country, or to their own domestic market.
Onshoring and nearshoring can help businesses to simplify their overly-complex supply chains, cut costs on things such as shipping and import/export tariffs, dramatically reduce fulfilment times and, as manufacturers place a growing emphasis on sustainability and ESG, significantly cut their global carbon footprint.
With many manufacturers facing so many headwinds and with the price of oil and gas rising ever further, bringing operations closer to home would seem to make a huge degree of strategic sense for manufacturing firms and acquisitions of national/regional counterparts can help them to achieve this quickly and efficiently.
BDO identifies nearshoring as a major trend within food and drink manufacturing in particular, with the subsector among the worst affected by soaring costs for production and shipping. The firm cites retailer Lidl’s acquisition of food firm Erfurter (through which the supermarket chain brought its pasta making processes in-house) as indicative of a wider trend for nearshoring and onshoring within food and drink manufacturing, asserting in its report: "We expect this trend to drive further M&A, with large grocers acquiring components of their existing supply chain to secure supply and enhance margins.”
Venture capital/PE interest
Clearly, as demonstrated by their prominent role driving many of the emerging M&A trends within manufacturing, the input of private equity and venture capital investors is one of the main drivers of dealmaking in the sector.
During 2022, surveys showed that venture capital and private equity investment in manufacturing mergers and acquisitions actually dipped slightly. According to Irwin Mitchell, 22.6 per cent of all manufacturing deals in 2022 were backed by venture capital (303 deals), a slight drop of the overall percentage compared to 22.9 per cent in 2021. Meanwhile, BDO reported that private equity buyouts fell from 21 per cent of all deals in 2021 to 19 per cent of all deals during 2022.
However, these figures followed a year in which private equity and venture capital activity rebounded in a huge way in the wake of the enormous disruption that COVID-19 caused among investors during 2020. With that in mind, the activity seen during 2022 remain extremely strong, with both venture capital and private equity accounting for around a fifth of activity last year, according to the two respective studies.
There are numerous reasons why private equity and venture capital would take such an interest in the manufacturing sector and these are likely to continue driving investment during 2023 and beyond. For one, manufacturing has huge scope for tech uptake in the form of digitalisation and automation and this is something that can deliver benefits which will help to generate huge returns for investors.
The industry also has a significant scope for consolidation across many subsectors, which will attract investors looking to back acquisitive buy and build growth strategies. Smaller manufacturers are coming under increasing pressure amid soaring energy bills and other headwinds, which will make many more open to an acquisition by a bigger, private equity-backed group.
Supply chain disruption, the need to contend with growing regulations and the aims of many firms to cut emissions will also mean that manufacturers will continue to seek investment in order to help them achieve these aims.
Earlier this year, West Midlands-based manufacturer LoneStar Group was acquired by private equity firm Epiris, which stated that it would seek to transform the firm through M&A-driven growth.
LoneStar is a global manufacturer and supplier of fasteners, pipeline packages, sealing products and precision-engineered components for industrial and energy clients around the world, with facilities and distribution points in the UK, the Middle East and the USA.
Discussing why the firm invested in LoneStar’s M&A strategy, Epiris partner Charles Elkington said: "LoneStar is typical of the kind of business in which we seek to invest. It is a high-quality business: a global market leader with scale and clear competitive differentiation.”
"It operates in attractive markets, benefiting from growing energy demand in both traditional and renewables. Most importantly, it is one which we believe we can transform by bringing our trademark focus on strategy, operational excellence and M&A."
Despite the resilience of the manufacturing sector in the face of so many headwinds, some degree of distressed M&A activity can still be expected, particularly among smaller and mid-sized operators who are most exposed to the worst effects of supply chain disruption and rising energy costs and may not have the available working capital to make necessary investments in their businesses.
Given their high energy use, manufacturers are among those most at risk following the winding back of government support with energy bills for businesses at the start of April 2023. Smaller firms are likely to be worst affected, creating acquisition opportunities, but also potentially leading to issues at larger businesses within their supply chains and fuelling distress among bigger operators.
As companies struggle with rising energy bills, as well as other headwinds, their capital position will take a severe negative hit, impacting their ability to pay their suppliers and putting them at risk of insolvency, something that will create problems for businesses further down their supply chains.
While this is grim news for many owners at manufacturing firms, it also means that there are likely to be considerable opportunities for buyers (either incumbents or market entrants) with acquisition capital to target distressed deals and pick up businesses and assets that, in other less trying circumstances, would be totally viable and may even have high growth potential given the right level of investment and improved economic conditions.
HI-Q is a global structural steel and mechanical design and detailing group based in the East Midlands. In the spring of 2023, the group fell into administration as a result of the impact of COVID-19, rising energy costs and inflationary pressures.
The group comprised Concord Limited, BAS Castings Limited and HI Quality Steel Castings Limited (HIQ) and operated iron and steel castings at sites in Pinxton and near Chesterfield.
Following an accelerated sale process by joint administrators Ross Connock and Edward Williams of PwC, the majority of the group’s business and assets were sold to Chesterfield Metal Technologies, a subsidiary of William Cook Holdings.
William Cook’s group managing director Chris Seymour commented: “We are delighted that we’ve managed to work with the joint administrators to complete the purchase of the majority of HIQ’s business and assets. We now look forward to stabilising the business utilising the strength and depth from across the rest of the William Cook group and working with HIQ’s employees who will be key to future growth and profitability.”
What will the future bring?
Well-capitalised firms, including those able to attract funding from private equity or venture capital investors, should have little problem, then, in identifying valuable distressed M&A opportunities throughout the rest of the year and beyond, with attractive businesses for sale, as well as assets, operations and facilities all likely to be available at cut prices.
Away from the distressed side of things, the prevalence of trends such as automation, AI, ESG/sustainability and nearshoring should continue to drive a strong degree of M&A activity. Manufacturers are facing growing pressure to adjust to rapid changes within the industry and acquisitions arguably offer the quickest and most efficient means of achieving this.
The catch is that many companies may not have the capital to execute deals, given the array of headwinds and cost pressures they face, meaning that much will depend upon whether venture capital and private equity interest in the sector continues, and on the reversal of tight bank to business lending.
Thankfully for solid businesses hoping to secure acquisition funding, there is little sign of a significant drop-off in investment activity, despite a slight decline last year. The sector’s resilience (so far) in the face of its mounting adverse pressures, as well as the emergence of high-growth trends such as automation and AI, should mean that investors continue to be attracted to the sector.
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