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Divestitures Continue to Drive Industrial Products M&A Activity in Third Quarter, According to PwC US

Uncertain Global Outlook, Eurozone Crisis and Slowing Growth in Emerging Markets Restrain Overall M&A Volume

NEW YORK, Nov. 8, 2012 /PRNewswire/ -- Overall merger & acquisition (M&A) activity in the global industrial products (IP) industry remained suppressed during the third quarter of 2012, as management teams remain cautious given ongoing global economic uncertainty, according to a series of quarterly M&A reports released today by PwC US.  Across the entire IP industry, there were 164 transactions worth $50 million or more totaling $81 billion in the third quarter of 2012, compared to 197 deals and $96.2 billion in total value during the same period in 2011. PwC's IP practice examined activity in the third quarter of 2012 across six sectors: aerospace & defense (A&D), chemicals, engineering & construction, industrial manufacturing, metals and transportation & logistics

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Given the restrained M&A environment, industrial products companies have continued to focus on restructuring and rightsizing operations. In line with this trend, deal activity in the third quarter of 2012 continued to include a high proportion of divestitures as companies sought to eliminate underperforming operations, as well as trim their exposure to slowing economies.  For example, in the A&D sector, 71 percent of deals worth $50 million or more involved divestitures during the third quarter, largely driven by defense companies divesting their non-strategic, industrial units. 

In addition, local deals continued to represent the majority, or 55 percent, of transactions across the IP sector during the third quarter, as companies focused on consolidating operations and driving synergies.  Asia and Oceania continued to attract the highest number of deals. 

"The M&A environment across the global industrial products industry remained subdued during the third quarter, given a range of concerns including the ongoing Eurozone crisis, slower growth in emerging markets and uncertainty regarding budget issues in the U.S.," said Robert McCutcheon, U.S. industrial products industry leader for PwC.  "Strategic investors remain the primary driver of deal activity as they take advantage of their strong balance sheets and attractive deal multiples to execute their long-term expansion plans.  M&A activity will likely remain at low levels for most IP segments for the remainder of the year as management teams carefully evaluate macro-economic developments and the near-term impact on their businesses."

Mega deals (transactions worth more than $1 billion) remain below 2011 levels and overall deal activity continues to be driven by smaller transactions (less than $50 million), consistent with the second quarter of 2012. There were a total of 18 mega deals across the IP industry during the third quarter of 2012, representing only one percent of total deal volume. For perspective, the metals industry had no mega deals in the third quarter and had only two deals valued at more than $500 million.  In addition, the A&D sector also recorded only one mega deal for all of 2012 thus far and that transaction was canceled.  

The industrial manufacturing sector bucked that trend in the third quarter with six mega deals, which helped to support a surge in transaction value to $25 billion, up from $19 billion in the previous quarter.  Despite a generally challenging macro-economic climate globally, the improved financial health of many corporations, as well as growth prospects in attractive niche product and geographic markets were among the likely drivers for the acceleration in deal activity in third quarter. The chemicals industry was also active with four mega deals, growing almost threefold to $11.7 billion compared to the second quarter of 2012.

Strategic investors drove the majority of deal activity across the industry, reflecting their focus on longer-term investment initiatives, while financial acquirers largely remained on the sidelines given near-term economic uncertainty coupled with their shorter-term approach to transactions. Across all IP sectors, nearly 70 percent of deals worth more than $50 million involved strategic investors in the third quarter of 2012.  Leading the pack, strategic investors represented 86 percent of third quarter deal activity in the A&D sector, followed by 77 percent in the industrial manufacturing sector and 70 percent in the engineering and construction segment. The notable exception was in the transportation and logistics sector, where financial investors represented 43 percent of deal volume during the third quarter. 

Reduced deal flow has further bolstered company balance sheets across multiple sectors, potentially boding well for future M&A activity.  "We are seeing a considerable number of investors who are taking a wait-and-see approach to M&A, as they closely monitor global economic and geo-political trends," noted McCutcheon.  "Meanwhile, liquidity remains healthy with average cash positions increasing and debt-to-capital levels continuing to decline among many companies across multiple sectors. Given slowing growth globally, these companies may ultimately put their cash to work in new ventures, which should result in an uptick in M&A activity."

The U.S. continued to attract notable interest in the IP M&A market given a range of positive factors including a more stable economy than many other countries, modest GDP growth, a strengthening currency and the emerging benefits of increased shale gas production in multiple sectors. 

"As China's economy continues to slow down and Europe deals with the ongoing sovereign debt crisis, the U.S. has become increasingly attractive to global companies searching for quality, inorganic growth options," McCutcheon added.

Looking at select sectors, deal activity in the metals industry dropped significantly in the third quarter of 2012.  Total metals industry deal value of $3.8 billion was down from total value of $9.1 billion in the third quarter of last year, representing the lowest level in three years.  This sector M&A activity is on pace to decline by as much as 50 percent for the full year.  In addition to the impact of the uncertain global macro-economic outlook, companies are not expected to accelerate acquisitions until declining base metals prices stabilize and supply starts to keep pace with demand.

Deal activity was also particularly sluggish in the engineering and construction industry, which has continued to lag well behind that of the previous two years. Based on year-to-date activity, it remains unlikely that the segment will reach 2011 M&A levels. Conversely, deal activity in the transportation and logistics sector remained healthy despite a small drop in overall volume.  However, total transportation and logistics deal value of $15.3 billion increased from $13.6 billion in the second quarter of 2012 given an increase in mega deals during the third quarter.

About PwC's Industrial Products practice
PwC's Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. For more information please visit: www.pwc.com/us/en/industrial-products

About the PwC Network
PwC firms help organizations and individuals create the value they're looking for. We're a network of firms in 158 countries with more than 180,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

Learn more about PwC by following us online: @PwC_LLP, YouTube, LinkedIn, Facebook and Google +.

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

SOURCE PwC US

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