Manufacturing and M&A confidence on the rise

Posted on 10 Jun 2015 by Callum Bentley

More than 80% of UK and European manufacturing and industrial companies are now “optimistic” or “very optimistic” about financial prospects for the sector, which is the highest level for two years.

This is according to Deloitte’s latest Manufacturing and Industrials M&A Predictions report, the biannual summary of the views of UK and European CEOs, CFOs and M&A Directors in the sector. With a combined market cap of approximately £100bn, the survey looks at these leaders’ expectations for M&A and capital markets.*

Active path ahead

Almost 80% of business leaders are continuing to look for acquisitions, with almost six in t10 expecting more deal activity in the next 12 months. This is in line with Deloitte’s latest M&A Index, where deal volumes were predicted to be eight per cent higher in the first half of 2015, than in the same period last year.

Against the background of falling bond yields, four in ten respondents anticipate that deal multiples will increase in the next 12 months. This is up almost 10% in six months.

Duncan Johnston, UK corporate finance manufacturing industry leader at Deloitte, explains: “The responses tell us a great deal about the current economic climate for UK and European manufacturing and industrial companies. We are seeing a continuing improvement in sentiment, both regarding the financial prospects for the sector, and for M&A activity. It has taken time for this confidence to impact on announced transaction volumes, which reach approximately $65.5 billion so far this year.”

Bank debt remains the most popular form of deal finance to undertake acquisitions, with 77% cent of respondents citing it as the most likely source for the next 12 months. This is in line with Deloitte’s most recent CFO survey, where financial officers across industries rated debt finance as the most attractive source of external funding.

Oil prices reduce demand

The majority (77%) of respondents expect that lower oil prices will somewhat or significantly reduce input costs. However, lower oil prices are also expected to reduce demand for products from customers, with over half citing the issue.

Ian Stewart, UK chief economist at Deloitte, explains: “Lower prices reduce industries’ input costs and also boost consumer spending power; these factors are some of the drivers of current European growth. Yet lower oil prices also dampen capital investment in the oil and gas sector. Weaker capex demand then feeds through to the capital goods manufacturing sectors.”

Decreasing popularity of emerging markets

Participants report that consolidation to achieve economies of scale and acquisition of market share, are the main drivers for M&A activity.

Expansion into emerging markets is viewed as a less significant driver in deal activity, perhaps suggesting that some manufacturers have become less confident about their prospects in these areas. When compared to Spring 2014, 25% fewer rated the factor as a main driver of M&A activity.

Stewart continues: “The deterioration of manufacturers’ sentiment for emerging markets is clear. The slowdown in China, lower commodity prices (impacting economies such as Russia), and geopolitical issues, (such as the Ukraine crisis), are all likely to have played a part in this sentimental shift.”

Johnston concludes: “Looking to the second half of 2015, we expect the manufacturing and industrials sector will see an uptick in M&A volumes in the market. Driven by a strong sector performance, improving confidence and the continued good availability of finance, we expect deal activity to increase and valuations for quality assets to hold up, over the remainder of the year.”