Report: Manufacturing Deals Review

2021 saw an impressive surge in transactions involving UK manufacturers, with 31% more deals completed than in 2020. BDO analysis reveals that 779 UK manufacturing deals completed in 2021, compared with 595 in 2020 and 686 in 2019. The rise on levels seen pre-pandemic is a trend revealed across the UK market as a whole, which saw the highest number of deals for 13 years in 2021.

Most sectors saw double-digit rebounds in activity levels, but the clear frontrunner was Engineering Services, which saw deals rise by 48% as businesses in the sector realised the opportunity to transact, gaining fresh perspectives and injections of funding for growth.

Optimism is high in the sector, in spite of considerable challenges around rising input prices, semiconductor shortages, supply chain disruption and availability of labour, to name a few. According to Make UK, three quarters of manufacturers are looking to stronger growth this year. Demand is high, order books are strong, and there is no shortage of money available in the market to back the most promising innovations and businesses aligned with the strongest growth drivers.

Key trends

1. Investors eye automation

Private equity maintained their share of deals in the market, but we saw particularly strong interest in industrial automation. An example was the MBO of Southgate Global backed by Rutland Partners, a deal on which BDO advised. The business is Europe’s largest trade supplier of machinery and equipment to the booming industrial packaging market, where businesses are increasingly investing in automation to improve productivity and ease workforce pressures.

The skills shortage coupled with wage inflation is accelerating adoption of automation, particularly given the tax incentives available. Businesses active in the automation sector say they cannot grow quickly enough to keep up with demand and have full order books for years to come. We can expect high demand for investment to continue fuelling M&A, as investors help businesses scale up.

2. Net zero beckons innovation

Sustainability initiatives have been in play for a number of years, but COP26 sharpened focus on the critical role manufacturers will play in years to come, helping the UK transition to a net zero economy. There is a substantial journey ahead to reduce emissions in manufacturing processes and the supply chain, re-engineer products and scale up the most promising innovations. As businesses and investors seek to align their portfolios with ESG goals, there is high interest in manufacturers focused on these opportunities.

An example from 2021 was the sale of our client Prolectric Services, UK market leader in temporary solar lighting, to Hill & Smith Holdings plc. Prolectric helps its clients transition from fossil fuels towards renewable energies, playing squarely into the vision of sustainable infrastructure.

Government policy is now firmly behind innovation. The UK Hydrogen Strategy is spurring advancement with its vision to support over 9,000 UK jobs and unlock £4bn investment by 2030, while Innovate UK has set aside a £1bn fund to accelerate the commercialisation of low-carbon technologies, systems and business models in power, buildings and industry.

3. Supply chain resilience and the role of M&A

Another major dynamic, in which M&A can play a key part, is supply chain resilience. The Covid-19 pandemic and geopolitical drivers have caused manufacturers to re-evaluate “just in time” processes and stock levels to ensure greater resilience. Many have taken action to ensure they have at least two sources of raw materials, and increasing numbers are “nearshoring” to avoid the risks of disruption from the global supply chain.

This dynamic is also evident in cross-border deal flow, with outward investment from the UK declining from 45% of cross-border deals in 2019, to 40% in 2020 and 32% in 2021 (101 deals). Meanwhile the US upped its acquisitions of UK manufacturers by 49% in 2021 to 82 deals. It is not surprising that UK targets are highly sought after by overseas acquirers, and we continue to see high engagement from overseas buyers in the M&A world.

2021 Manufacturing deals analysis

2021 deals

779 deals involving a UK manufacturer in 2021, representing a 31% increase on 2020, and a 14% increase on 2019 pre-pandemic levels.

Particularly high levels of activity in Q4 2020 and Q1 2021, representing catch up activity, resilient subsectors and renewed investor appetite.

Most active sectors

Proportions of deals across subsectors remains largely unchanged, with Engineering accounting for the largest portion, followed by Food & Drink, Building Products and Life Sciences.

Strong increases in activity levels across Engineering, Food & Drink and Chemicals in both 2020 and 2021.

Engineering deals rose by 48% in 2021, while Food & Drink increased by 30% and Chemicals by 71%.

Buy-outs account for 21% of deals in 2021

Buy-outs maintain share of 1 in 5 deals.

PE increase interest in Food & Drink sector to 23% of deals in 2021, up from 16% in 2020.

Industrial Automation has been another key sector for PE investment, accounting for 24% of deals.

Cross-border deals

Cross-border deals dip from 45% of deals in 2020 to 40% in 2021. Sales of UK targets to overseas buyers rose by 31% to 214 deals, while acquisitions of overseas targets by UK businesses declined by 4% to 101 deals.

On both sides of the coin, North America cements its position as a key trading partner, representing 31% of overseas buyers of UK manufacturers, and 48% of overseas targets for UK buyers.

Listed industrials businesses

The FTSE market has continued to improve through 2021, with investors looking to growth. The BDO Industrials index has mirrored the market trend and continues to trade at a premium to the FTSE 100. Industrials profit multiples have been steadier than the wider market, which has experienced more volatility over the year.

Looking ahead

On a quarterly basis, the highest surge in deal activity came in Q4 2020 and Q1 2021, as pent-up demand was met, so we would expect to see a levelling out in activity levels through 2022. That said, we may see an increase in the share of deals completed by private equity, given recent evidence from a Make UK / BDO survey that a third of manufacturers are now looking to PE investment to help fund the growth of their business.

In spite of geo-political uncertainty, we would expect this eagerness, coupled with the sheer quantity of private equity ‘dry powder’ to convert to considerable deal flow in the manufacturing sector this year.

Key themes for 2022

ESG and sustainability

Innovative technologies and automation

Private equity investment

Diversification

Supply chain and import/export challenges

Raw material shortages and input price rises

Inflation

STEM skills shortage