Constantine Biller, partner at mid-market advisory firm Clearwater International takes a look at the thriving flow product sector, and how big corporates and private equity firms are beginning to recognise the need for these specialist manufacturers.
Worth an estimated $70bn a year, the global flow products market is a rapidly growing sector. The UK in recent years has seen a rise in these specialist manufacturers becoming a target for both trade and private equity buyers. However, the market, whilst strong, suffers from being fragmented. Due to this, the UK is now seeing a recent surge of interest from buyers to try and group these businesses together.
Quality is the major attraction for investing into UK engineering companies. With flow products being at the core of some of the most vital processes across sectors such as pharmaceuticals, oil and gas and chemicals, any loss of quality has detrimental effects for these businesses. This demand for quality products from the UK has now spread across Europe and further afield, making a specialist manufacturer a priority target from both trade buyers and private equity.
From a trade perspective, the opportunity to ensure all products consistently meet the highest standards, makes an acquisition of a specialist manufacturer a good strategic move. The appetite from trade buyers is demonstrated by examples such as control valve engineering specialist Severn Glocon Group acquisition of UK-based high pressure high temperature (HPHT) tools company Calidus Engineering back in 2013. As well as this, the firm has further strengthened its offering with cross-border transactions including the acquisitions of German manufacturers A-T Armaturen-Technik and HP Valve Engineering, both of which specialise in the production of high pressure controls.
With British manufacturing seen as the pinnacle of quality, a great number of international buyers have also shown interest, with global engineering group IMI acquiring global power valve specialist Bopp and Reuther in a deal worth £120m in November 2014. International appetite for acquisitions then shows no signs of slowing, enabling these foreign buyers to boost its capabilities.
Private equity has also developed an appetite for flow products. With the majority of UK manufacturers working in severe services such as oil and gas and pharmaceuticals, the opportunity to buy and build is particularly attractive. In addition, the sector offers the potential to develop flow product manufacturers with a broad offering, enabling them to grow into a ‘one-stop’ shop for these products. Private equity also spotted the huge potential to expand geographically in this market. With flow product demand high across the world and with new markets emerging in the Far East and Latin America, UK manufacturers are turning to overseas markets for growth.
The future for the flow product industry looks promising. The opportunity to cement this fragmented market both domestically and internationally will cause an increase of M&A going into 2015 and beyond. This is particularly relevant in the mid-market, where the majority of these manufacturing businesses now sit. We may also see the smaller-end becoming a target, particularly from private equity, due to the strong, often family-run, management teams which have a firm foothold in the market.