UK Manufacturing and Distribution businesses faced considerable pressure during the first half of 2023 as higher interest rates, inflation and weaker demand affected output, margins and M&A activity.
Transaction volumes declined sharply compared with the same period in 2022. However, the sector continued to attract buyers seeking specialist expertise, established brands, operational efficiencies and strategically valuable capabilities.
Polestar CF’s Manufacturing and Distribution Sector Valuation examines public-market multiples, reported transactions and the principal themes shaping the sector in August 2023.
The UK manufacturing output index fell to a seven-month low of 46.5 as consumers and businesses reduced discretionary spending.
Raw-material, labour, supply-chain and energy costs continued to place pressure on margins, forcing manufacturers to review their operating models. At the same time, more stable conditions and easing inflation created some expectation of modest short-term growth.
Cost pressures increased the importance of optimisation, efficiency and digital transformation across Manufacturing and Distribution.
UK businesses were being pushed to adopt new technologies to control costs and improve operations. Tata Group’s planned £4 billion UK gigafactory demonstrated the scale of investment taking place within advanced manufacturing.
Buyers were also shifting their attention from speculative growth towards strategic opportunities. This favoured businesses where technology and digital transformation could improve efficiency and support integration following an acquisition.
Manufacturing businesses are commonly valued using EBITDA or cash generation because materials, labour and distribution represent a significant proportion of their costs.
Public-market valuations demonstrated premiums for businesses with specialist knowledge, advanced technology or strong brands. More commoditised subsectors, including Construction and Print and Packaging, attracted lower multiples.
Overall Manufacturing and Distribution multiples were expected to remain relatively stable, with only modest differences between current and forward EBITDA valuations.
Aerospace and Defence businesses were trading at:
Profitability was expected to benefit from the recovery of the travel market and higher defence spending following continued uncertainty surrounding Ukraine.
Rolls-Royce raised its profit expectations from £0.8-£1 billion to £1.2-£1.4 billion, supported by operational improvements, increased military expenditure and the recovery of long-haul aviation.
General Electric also increased its full-year profit outlook following strong demand for jet-engine spare parts and services.
Construction businesses were trading at:
Construction remained one of the lower-valued subsectors, reflecting its more commoditised characteristics compared with specialist manufacturing and technology-led businesses.
Consumer and Branded businesses were trading at:
The premium over more commoditised areas demonstrated the value investors placed on established brands.
Food Production businesses were trading at:
Food Production was one of the most active Manufacturing and Distribution subsectors, recording 45 reported transactions during the six-month period.
Industrial Technology achieved some of the sector’s highest valuation multiples:
The subsector also recorded the highest level of deal activity, with 53 transactions during the period. Twenty-two of these involved international acquirers.
Print and Packaging businesses were trading at:
The subsector attracted lower multiples than more specialist areas but recorded 16 transactions during the period.
Specialist Manufacturing businesses were trading at:
The revenue premium reflected the value associated with specialist knowledge and differentiated manufacturing capabilities.
There were 140 reported Manufacturing and Distribution transactions during the six-month period covered by the review, compared with 466 during the equivalent period in 2022.
Activity was divided between the principal subsectors as follows:
International buyers completed 44 of the 140 reported transactions. Industrial Technology attracted the greatest international interest, accounting for 22 internationally backed acquisitions.
Higher interest rates and weaker economic conditions contributed to the reduction in transaction volumes.
Buyers increasingly prioritised strategic acquisitions over transactions dependent on speculative future growth. Companies were also considering acquisitions that could be funded from their existing balance sheets, avoiding the higher debt and regulatory requirements associated with larger transactions.
This created opportunities for further consolidation among smaller and mid-market businesses.
The change in market conditions increased the level of evidence buyers required during a transaction.
When inexpensive capital was widely available, sellers could sometimes provide limited information and still achieve premium valuations. In the more selective 2023 market, buyers expected clearer evidence supporting financial performance and valuation assumptions.
Businesses considering a sale therefore needed to prepare thoroughly. Insufficient information could lead to price reductions, a longer transaction process or buyer withdrawal.
Barnes acquired aerospace and defence business MB Aerospace for £577 million.
The transaction represented a multiple of approximately 11.4 times 2023 EBITDA.
CCL Industries acquired Print and Packaging business Oomph Made for £4.8 million.
The transaction represented approximately 1.05 times 2022 revenue.
Halma acquired Industrial Technology company FirePro for £129 million.
The transaction represented approximately 14 times 2023 EBIT.
Caledonia Investments acquired Industrial Technology business AIR-serv for £143 million.
The transaction represented approximately 11.4 times 2022 EBITDA.
THG acquired Food Production business Brighter Foods for £43 million.
The transaction represented approximately 6.6 times 2022 EBITDA.
Finsbury Food Group acquired Lees Foods for £5.7 million.
Three themes were expected to continue shaping the sector: supply-chain risk management, decarbonisation and workforce development.
Disruption to air and surface transport, higher raw-material costs and labour shortages placed additional pressure on manufacturers.
Operators increasingly needed to manage demand volatility and supply risk. Stress testing, mitigation planning and contingency arrangements became important when assessing the resilience of manufacturing operations.
Businesses also needed to consider the economic effects of disruption within China’s manufacturing hubs.
Manufacturing accounted for 12% of UK greenhouse-gas emissions, with more than half generated by steel, cement and chemical manufacturing.
Investment in more efficient and environmentally sustainable equipment was expected to continue as the sector moved towards a net-zero economy.
Achieving substantial reductions in emissions was likely to require sustained and sophisticated government support. However, pressure on government finances shifted more of the investment requirement towards private businesses.
Some industry leaders remained concerned that focusing on ESG could reduce short-term profitability. Nevertheless, regulation and the requirements of funding providers increased the longer-term value of building more sustainable operations.
Businesses capable of improving an acquirer’s environmental credentials were expected to attract greater valuation premiums as international markets increased their focus on sustainability.
Labour retention and workforce development remained important as companies sought to operate efficiently in a higher-cost environment.
Manufacturers needed workforces with the skills required to support smarter and more efficient operations. Businesses also needed to use their existing employees effectively to drive growth.
Companies with internal development programmes and training academies attracted particular interest because these initiatives helped them build specialist expertise and differentiate themselves from competitors.
There were 140 reported transactions during the six-month period covered by the review, compared with 466 during the equivalent period in 2022.
Industrial Technology recorded 53 transactions, making it the most active subsector. Food Production followed with 45 deals.
International acquirers completed 44 of the 140 reported transactions. Twenty-two international acquisitions involved Industrial Technology businesses.
Industrial Technology recorded the highest current EBITDA multiple at 17.64 times. Aerospace and Defence followed at 17.08 times.
Public-market multiples demonstrated premiums for businesses offering specialist knowledge, advanced technology or established brands compared with more commoditised subsectors.
Higher interest rates, economic uncertainty and pressure on business performance contributed to lower transaction activity. Buyers also became more selective and focused on strategic rather than speculative growth.
Buyers required stronger evidence to support financial performance and valuation assumptions. Businesses that were insufficiently prepared faced a greater risk of price reductions, delays or buyer withdrawal.
Supply-chain resilience, decarbonisation, digital transformation and workforce development were among the principal issues affecting Manufacturing and Distribution businesses.
Regulation and funder requirements increased the importance of environmental performance. Businesses capable of strengthening an acquirer’s sustainability credentials were expected to attract greater interest and potentially higher valuation premiums.
