Manufacturing Deals Review

• 2024 deal volumes on a par with H1 2023, with 307 transactions completing.

• Proportions of deals across subsectors remain largely consistent, with Engineering Services edging up its share.
• The top four sectors for deal activity in H1 2024 held firm, with Engineering Services, Food & Drink, Building Products and Packaging & Materials remaining the most popular sectors for M&A activity. 
• Engineering Services increased its share from 28% to 30% of all deals in the sector. Food & Drink held onto its position as the second most active sector, with a 13% share. Life Sciences and Test & Measurement increased their shares slightly, overtaking Industrial Automation.

  
  

• Investor activity is holding firm, with buy-out volumes representing 18% of H1 2024 deals.
• Buy-out volumes held a share of 14% in H1 2023, rising to 18% in H2 2023 and continuing at this level through the first half of 2024.
• Sectors attracting more than 20% share of investor-led deals were Engineering Services, Life Sciences and Building Products.
• Corporate buyers dominate in Chemicals, Food & Drink and Test & Measurement.

• The proportion of cross-border transactions dipped to 34% in H1 2024, down from 37% in 2023 and 2022.
• Cross-border deals are still weighted heavily towards inward investment with UK targets remaining highly attractive to overseas investors. Two-thirds of cross-border deals reflect international buyers acquiring UK assets, with Europe accounting for just over half of investment, followed by North America with 39%.
• Outward investment from the UK is reciprocated into Europe and North America in similar proportions, albeit in smaller volumes.

  
  

  
  

   

  
  

• The markets continue to hold up well and saw a bounce in the summer coinciding with the UK General Election.
• BDO industrials index continues to track the FTSE 100 at a premium. 
• Industrials EV/EBITDA multiples have edged up a little, trading slightly ahead of FTSE 100 multiples.

• We expect the UK manufacturing market to see strong levels of M&A activity in the remainder of 2024 as long as the UK Government does not hit capital gains tax for entrepreneurs
• The political backdrop has settled, inflation continues to subside and UK interest rates have been cut providing a more conducive environment to M&A. The cloud on the horizon is the threat of a potential capital gains tax rise in the Autumn Budget which has the potential to impact sentiment towards M&A transactions.
• Valuations are holding firm in the industrials sector which continues to attract cash-rich investors who believe in the long-term prospects and broad opportunities for growth.
• Manufacturing remains one of the most resilient sectors with a wide range of market drivers, including ESG, technology, product expansion and transformation motivating M&A activity.

  
  

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 certainly proved 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.

With its sister sector Test & Measurement, Industrial Automation represented 16% of all deals in 2023. In H1 2024 the share declined slightly to 13%, but it continues to represent a significant volume of advanced UK manufacturing businesses active in the M&A market.

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 these have averaged between 12.5x and 15x EV/EBITDA, and during 2024 so far, multiples have remained within 14-15x EV/EBITDA range.

Deals such as the acquisition of Automated Control Solutions by Aliter Capital-backed Edwin James in early 2024 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 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.  The business has since gone on to acquire Motivair which introduces a new service offering to the critical engineering services group.

A further example is the recent sale of advanced measurement solutions provider Torus Technology Group to Industrial Physics LLC, another PE backed business. Backed by KKR, a leading global investment firm focused on acquiring and building businesses within the Test & Measurement sector, Industrial Physics is a global provider of advanced testing and inspection solutions, serving the food & drink, packaging and other industries. BDO advised the shareholders of Torus.

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 Email: matthew.goodliffe@bdo.co.uk

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. 

Nevertheless, 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 Email: todd.mills@bdo.co.uk

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 and our Renewables Annual Report 2024

Rustem Zagretdinov Tel: +44(0)7788 474991  Email: rustem.zagretdinov@bdo.co.uk

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 trend continued into H1 2024, with Food & Drink M&A representing 13% of manufacturing deals, the second most prolific sector after Engineering Services.

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 and conglomerates active this year, for example Mitsubishi sold UK canned food business Princes to Italian food group Newlat for £700m, and on the international stage Mars has offered for snack rival Pringles in a $36bn deal.  Another recent move includes the proposed sale of soft drinks giant Britvic to Carlsberg in a deal which values the business at £3.3bn.

Certain sectors are particularly active: pet food is firmly in the spotlight, as brands consolidate positions in a fast-growing market. Deals taking place during summer 2024 include the acquisition of Thrive Pet Foods by Swedish consortium Petbuddy Group. Thrive is a well-established brand in fast-growing freeze-dried treats alongside traditional cat and dog food.  Private equity is equally keen on the pet market, for example Inflexion sold Lintbells in August, a UK-based pets supplements business to Vetnique Labs, which is backed by Gryphon Investors.   And Butcher’s Pet Care, a UK-based premium dog food manufacturer was acquired in August by Inspired Pet Nutrition, backed by CapVest.

Inflation dropped for the fifteenth consecutive month in June 2024 to 1.5% and remained steady throughout July at 1.5% the lowest annual rate of inflation for food and non-alcoholic drinks since October 2021. Signs that the industry is turning a corner is hugely encouraging for businesses in the sector, which has faced eyewatering inflation rates in recent years – including a high 19.2% in March 2023. 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 still seeing dramatic spikes in 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 troubles 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 has posed challenges for profitability. That said, the output of the sector increased more than any other sector during July 2024, with Food & Drink manufacturers also raising their prices. 
  
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. BDO’s 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

John Gethen Tel: 07800 951 871 Email: John.Gethen@bdo.co.uk

Eleanor Fearne Tel: 07929 058581 Email: eleanor.fearne@bdo.co.uk

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 record volume of transactions in the packaging sector in an otherwise subdued M&A market. Deal volumes increased by 24%, reflecting a resilient sector that is transforming at pace. For many packaging businesses, M&A has been a key strategic initiative, with deals continuing apace in H1 2024.

The bulk of deals have been across the mid-market, but with a nod to renewed confidence across the packaging ecosystem, we have also seen the return of large cap deals, with WestRock and Smurfit Kappa combining to form Smurfit WestRock, a c.£30bn revenue global leader in sustainable packaging. A further high-profile deal is in play this year with the potential £7.8bn acquisition of DS Smith by International Paper, evidencing the strategic need for consolidation across the sector to drive value for shareholders.

Regulatory reforms, the drive to sustainability, and the need to deliver differentiated products to customers and consumer are key factors spurring M&A in the sector. 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, 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 our 2024 Packaging sector insights here.

Alan Chan Tel: 07800 682871 Email: alan.chan@bdo.co.uk