Manufacturing Deals Review

Manufacturing Deals Review

Will 2024 be a bumper year for Manufacturing M&A? 

One in four UK manufacturers are considering a sale of all or part of their business in the next couple of years, and 29% in the next three to five years, according to a recent Make UK/BDO survey. And a further 38% of businesses surveyed are looking to make acquisitions in the next three to five years. 

Why is this? Deal numbers were down 11% in 2023, as businesses battled inflationary pressures, protected cashflow and prioritised stability. The review reveals:

  • 706 UK manufacturing deals completed in 2023
  • Top sectors for deal activity: Engineering Services, Food & Drink, Building Products, Packaging & Materials and Industrial Automation
  • Buy-out volumes dipped to 16%, but 20% of manufacturers expect to seek private equity investment in the next one to five years 
  • Cross-border activity held firm representing 37% of deals in 2023.

Two of the prominent features of M&A in 2023 were deal delays and more extensive due diligence. Both reflected the buyers’ search for true sustainable profit levels, amongst the noise of post-Covid trading bounce, supply chain issues, price, and margin shifts, as well as rising costs, labour shortages, and geopolitical tensions. 

Despite the drop, analysis shows that the slower activity was mostly confined to the first half of the year. In the last six months, more than 400 deals were completed with the momentum expected to continue into the next 12 months.

We speak to many buyers and investors with both cash and appetite. One in five manufacturers say they are likely to seek private equity investment in the next one to five years. Valuation expectations have converged more closely between buyers and sellers, as the fog obscuring true underlying profit lifts. Another year of post-Covid trading should help to reassure buyers and encourage them to take advantage of the huge opportunities an acquisition can bring.

Digital transformation and the green transition remain high on the agenda, with sustainability now playing an integral role in every Industrials deal we see. Private equity (PE) still has huge quantities of cash to deploy, and opportunities in the capital markets could well open up.

However, world events continue to cast a shadow, and further economic or political shocks can’t be discounted. The upcoming UK and US elections could impact sentiment, tax regimes, investment, regulation, and policies. But just as the world keeps turning, Manufacturing and Industrials businesses continue to trade, invest, evolve, advance and thrive.

Deals review

M&A in the Manufacturing sector has been surprisingly resilient over recent years.  Click through our detailed analysis to find out more.

  • Deal volumes declined 11% in 2023, with 706 completions in the year
  • Following a slow first half with 305 deals, H2 saw a strong recovery, with just over 400 deals.

  • The top five sectors for deal activity in 2023 were Engineering Services, Food & Drink, Building Products, Packaging & Materials and Industrial Automation.
  • Most subsectors saw a decline in 2023 activity levels, with notable exceptions from Food & Drink, Industrial Automation and Chemicals.
  • Food & Drink manufacturing deals rose by 29% and increased share of deals from 10% in 2022 to 14% in 2023, while Industrial Automation M&A rose by 11%, to become the fifth largest subsector, overtaking Life Sciences. Chemicals deals also increased, with 33 in 2022 and 45 in 2023.

  • Buy-out volumes dipped to 16% of 2023 deals, down from 19% in 2022.
  • Activity in H1 was notably lower, but rebounded to 18% in H2, as headwinds subsided, and investor confidence returned.
  • The sectors attracting the most interest from PE investors were Industrial Automation (17% of deals), Engineering Services (20%) and Building Products (24%).
  • Corporate buyers continue to dominate in Food & Drink and Life Sciences.

  • Cross-border activity held firm representing 37% of deals in 2023.
  • The shift towards inward investment has continued, with 181 UK businesses sold to international acquirers, representing over two-thirds of cross-border deals.
  • 62% of overseas buyers were European investors, followed by North America (29%).
  • Under a third of cross-border M&A was outward investment: 83 overseas targets were acquired by UK businesses. Nearly half of all outward investment was into Europe and 39% was to North America.

  • The listed markets continue to hold up well, considering ongoing volatility in the economic and geo-political landscape. 
  • The BDO Industrials index continues to track the FTSE 100 at a premium and Industrials EV/EBITDA multiples have returned to historic norms. 
  • A cautious investment environment has impacted the sector, such that there are a wide array of quality UK assets representing good value for investors in the public markets. We could see more interest in capital markets activity this year, including IPOs, fundraisings, and de-listings.

  • We expect to see a solid year of M&A ahead.
  • H2 2023 saw an encouraging resurgence in M&A deals despite ongoing challenge. The lower and mid-market continued to transact at volume.
  • Key market drivers of ESG, product expansion and transformation are core motivators for M&A activity across the manufacturing and industrials sector. New disruptive technologies will continue to emerge and create opportunity.
  • Macro-level uncertainty this year that could shift sentiment. 
  • Dynamic landscape of resilient and resourceful business owners and cash-rich, stalwart investors who want to get deals done.

Key market themes

Sector spotlights

Last year we predicted that the Industrial Automation sector would remain attractive to both trade acquirers and PE investors, despite the wider macro-economic headwinds impacting the manufacturing sector in 2023. This has certainly been proven to be the case, with our analysis of UK M&A deals showing an increase in Industrial Automation deals of 11% in the year to a total of 70 deals, despite a backdrop of an 11% decline in the sector as a whole.

The 2022 McKinsey Global Industrial Robotics survey showed that companies are betting big on robotics and automation, with many, across a range of end sectors, predicting that automated systems would account for some 25% of capital spending over the next five years. The underlying growth drivers in the sector are cutting through the macro-economic noise and businesses coming to market in the space are highly sought after. They are attracting strong valuation multiples, helped by other sought-after traits such as secured orderbooks, recurring software or service revenues, IP ownership, high barriers to entry and impressive margins. An index of listed Industrial Automation and Equipment businesses has seen average valuation multiples remain relatively stable since the start of 2022 - between 12.5x and 15x EV/EBITDA.

Deals such as the acquisition of Automated Control Solutions by Aliter Capital-backed Edwin James (advised by BDO) are representative of the type of activity we expect to continue to see. With extensive experience and knowledge of the demands of the modern manufacturing process, ACS offer complete systems integration from automation systems, electrical control, information solutions and ERP integration and has clients including spanning a wide range of end sectors. This is a prime example of a PE backed business targeting growth through a buy and build strategy whilst enhancing its capabilities, in this case expanding the group’s digitalisation offering, growing its systems integration and operational technology automation capacity. 

Industrial Automation is likely to remain one of manufacturing’s hot spots for M&A this year, with volumes and valuations reflecting the high gains that could be realised.

Read more of our M&A insights

Matthew Goodliffe
Tel: 07800 682418

The Manufacturing and Industrials sector continues to be home for circular economy innovation with nearly a third of BDO circular economy investments made into the sector in 2023. Over 60 circular economy investments were made into the sector in the year, with more than £400m of capital deployed.

Over £200m has been invested in businesses delivering sustainable products either by way of new and innovative circular input materials, or by manufacturing products that are inherently circular by design.

18 investments were made into businesses pioneering new ways of recovering materials for re-use. As well as traditional PE and venture capital investment there has been a significant rise in corporate venturing with Nestle, Evonik and Wizz Airlines all injecting capital into new circular technologies in 2023. We expect this trend to continue with a growing number of corporates setting aside capital to invest in sustainable solutions for their given subsector. 

Despite this the transition from linear to circular business models is a challenge, particularly for long and well-established businesses in the sector. In theory, circular business models are a no brainer. At the heart of a circular ethos is to make manufacturing more efficient, cutting out wasted time, effort, and materials, to drive stronger margins. However, implementing change is challenging, requiring a significant investment in both time and money. 

Those being put off by these constraints should reflect on the results of our manufacturing circular economy survey where one in five businesses believe that they will not exist in a decade’s time if they continue to operate linear models.

M&A will help bridge the gap between the requirement to transition towards circularity and the time and resource constraints of larger manufacturing organisations. Corporates can benefit by identifying circular innovation in smaller, more agile businesses, which can be acquired and applied across their existing operations.

Read more of our Circular Economy insights

Todd Mills
Tel: 07583 116442

Emissions targets are regularly in the headlines as the UK government remains committed to reaching net zero by 2050. The areas to address are complex and multi-faceted, with colossal investment required in the energy transition to meet goals. Of the £775bn announced for UK infrastructure and construction over the next decade, nearly half is earmarked for the Energy sector. And the £4.5bn announced for British manufacturing is aimed at supporting the drive to net zero and a more sustainable economy. 

Initiatives in renewables, heat pumps and electric vehicles (EV) are attracting a lot of attention, innovation and funding.  The Wind sector is expected to grow between 10% and 20% per annum; the number of EV charge points is projected to grow at up to 30% p.a. until at least 2030. These are large and growing markets, with immense opportunities for manufacturers and service businesses alike.

The net zero transition is expected to result in a 50% increase in demand for electricity by 2035, so it can only be effective if the supporting infrastructure is in place. The UK Grid has not been built for decentralised production, offshore wind, intermittent production, nor the sheer capacity required as demand increases exponentially.  National Grid laid out plans for a £54bn upgrade, which will grow the grid five-fold. Given the commitment to energy transition and the size of investment required, Government will have no option but to pursue (partial) nationalisation and high levels of private financing.

There is already a great deal of investment and M&A taking place in this market, as PE and corporates align with the market opportunity. BDO has recently advised on three such deals: Venterra’s acquisition of CAPE Holland, manufacturer of specialist Vibro Lifting Tools, used to drive offshore wind turbine monopiles into the seabed; the acquisition of two utility-scale battery storage development projects by West Burton Energy; and the investment in Project Better Energy, a solar and renewable energy service provider by Freshstream Investment Partners. Another key assignment has included the development of a strategy to build a gigafactory on behalf of a major battery technology firm. We advised on potential location, best use cases, and the size of the market opportunity, plus a review of end markets such as automotive and utility scale storage.

In coming years this sector will see strong growth. Manufacturers will need to address the need for pylons, transformers and substations, for battery storage, for wind and solar and EV charging infrastructure.  Opportunities for manufacturers and industrials services companies to supply the equipment, to install it and then to maintain & service it across all parts of the market will be significant. 

Read more of our Energy Infrastructure insights

Rustem Zagretdinov
+44(0)7788 474991 

Food & Drink M&A was robust in 2023, seeing the second highest volume of deals in the last five years. It was one of the few sectors to see growth in the year and H2 was particularly strong.   

The robustness of the sector to weather headwinds, paired with continued innovation and the importance of its role in supplying an ever-growing population presents fruitful opportunities. Trade acquirers lead the field, with well-known brands active again in 2023; notable transactions include Mars’ acquisition of Hotel Chocolat and Diageo’s acquisition of Don Papa Rum.

Inflation dropped for the ninth consecutive month in December 2023 to 8%, the lowest rate of inflation for food and non-alcoholic drinks since April 2022. But it may take some time for this to be reflected in any significant reduction in input costs. Whilst certain production costs are currently lower than they were this time last year, it is a mixed picture, with the price of imported ingredients in particular rising at a fast pace. Olive oil, cocoa and sugar are amongst the products to have attracted the highest rates of inflation.

Cost pressures continue to loom large, and the anticipated minimum wage increase will further stretch businesses. Food & Drink manufacturers are reliant on imports from across the world, and the Red Sea crisis has not only impacted the supply of key food commodities like oil, wheat, rice, and exotic fruits and spices, but also petrol and other components of production. An increase in delivery times and cost base of raw ingredients and energy poses challenge for profitability, production and the sustainability of supply chains for the sector.
ESG remains in focus. As an industry that accounts for 70% of freshwater withdrawal and 25% of global greenhouse gas emissions, drives towards greater sustainability are essential. Businesses are most concerned about the anticipated changes to packaging regulations and carbon net zero targets, whilst transparency of supply chains is a key challenge. ESG has become an essential part of M&A strategy; within the due diligence process acquirers are taking a long-term view on ESG value creation, and in some cases, aborting deals where a target’s ESG proposition is subpar.
In what looks like another year of challenge and opportunity, M&A will remain an important ingredient in the strategic baskets of corporates and investors. The recent BDO Food and Drink Survey revealed 24% of Food and Drink manufacturers are looking to acquire in the next year, and 25% said they could be seeking buyers, with 35% considering the option of a sale in the next three to five years. 

Read more of our Food & Drink insights here.

Eleanor Fearne
Tel: 07929 058581
Patrick Starrett
Tel: 07827 063206

The Packaging & Materials sector has been an active arena for deal activity in recent years fuelled by innovation, regulation and sustainability with interest from both PE and corporates. 

2023 saw a decline in UK deal volumes in the sector, but Packaging itself was the bright spark, with deal activity increasing in the year, offsetting a reduction in activity experienced in other materials including textiles, steel/aluminium and recycling. 

We have seen the value of packaging transcend practical and functional properties to contribute significantly to the perception of the brand, portraying how companies are managing and tackling sustainability, amongst other current topical issues. 

The Plastic Packaging Tax, introduced during 2022, is continually evolving, and is designed to encourage businesses to embed circularity into products and to reduce the use of virgin plastic. There is a long journey ahead towards becoming a truly circular economy, but we are seeing the impact of legislation drive change in material choices, for example reducing volumes of plastic in certain food segments and replacing with more paper and recyclable aluminium and foil products.  

The market has faced a cocktail of challenges, with cost pressures being a major theme. Inflation (which is subsiding but could be impacted again by political developments), high interest rates, and the ability to pass-through price increases, meaning strategies need to be carefully designed with clear plans in place, while enhancing efficiencies to improve margins and bottom line will continue to differentiate stronger business models. 

Packaging M&A will remain an attractive option as corporates and PE backed businesses seek growth in the midst of a challenging climate, as well as identifying opportunities to achieve leading positions in chosen markets and to build up specialist capabilities in attractive niches. Companies continue to find opportunities and value through M&A: gaining market share, access to innovative products or process and/or people will continue to drive activity in the space. 

Read more of our Packaging sector insights here.

Alan Chan
Tel: 07800 682871

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Daniel Guttmann

Daniel Guttmann

Deal Advisory Partner – Commercial Due Diligence
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Andrew Sproule

Andrew Sproule

Deal Advisory Managing Director - Transaction Services
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