Industrial Electronics - Sensors M&A update Winter 2011 M&A activity will Corporates look for global scale as increase as firms drive for scale application range for sensors widens Sensors are now core components in almost all technology products. Their application is extremely broad, with end markets ranging from automotive and aerospace to industrial safety and consumer electronics. Whilst the general economic outlook for 2012 is expected to “There are few industrial remain challenging, we forecast demand for sensors will grow sectors with so many serial strongly driven by the development acquirers - their strategies are of smaller, more reliable and well defined and pipelines of increasingly sophisticated sensors deals are increasing” and the need for safer, cleaner Mark Humphries, Partner and more efficient applications. The key observations from flow - the most measured parameters) Divestments in lower our research: serving a range of end markets. The acquired businesses havemargin cyclical markets generally had extensive overseas In the last three years, international not yet complete corporates have used M&A to exit less distribution operations. attractive businesses with highly cyclical Major sensor manufacturers have used end markets and chosen to enter M&A to evolve their offerings to address markets with higher growth and end product markets which consume margins. We believe this process has either higher volumes of sensors or further to go. higher value components and The US and UK has led M&A in sensor sub-systems. Corporates and sensor systems accounting for over Catalyst Corporate Finance LLP 2011 Larger trade players are aggressively 70% of all deals completed by aggressively targeting corporates or private equity investors. targeting China. Whilst the typical sensor content in a Chinese car is sales in China Building scale is seen as critical. typically 50% less than North America Trade acquirers have purchased UK and Western Europe, it is rapidly businesses with complementary core expanding and represents an excellent sensor technologies (especially growth opportunity. temperature, pressure, level and
Industrial Electronics - Sensors M&A update Figure 1: Supply chain for sensors and instrumentation Components Sub-systems Instruments End markets Sensors Wireless Networks Analytical Defence/Security Physical Pharmaceuticals & Radioactivity Autonomous Systems Scientific Biotechnology & Robotics Electromagnetic radiation Test & Measurement Aerospace Pressure Vacuum Space Auditory Metrology Scientific (inc Electrostatic Cryogenics Research Facilities) Magnetic Process Imaging Oil & Gas Vibration Control Healthcare Deformation/Stress Displays Mining Position Distributed Computing Life Science Temperature Built Environment Electronic Power Systems Environmental Photonic Chemical Automotive Biological Semiconductor Optics Arts & Heritage Industrial Global Sensor Value of Food Market End Products >$50 billion >$1.500 billionSource: Catalyst Corporate Finance, Knowledge Transfer Network The UK operates Industry Trends based companies has been in scaling operations to address opportunities outside their traditional end markets globally but remains The UK remains one of the world’s and capitalising on the demand in a largely fragmented leading producers of high performance new niches and geographies. sensors. The industry is concentrated niche market on high-end production and design Research and development budgets rather than high volume manufacturing. run at typically 6% of sales. Without scale, it is often difficult for UK There are around 23 major sensor types businesses to justify the investment in used around the world. These are R&D and they risk not making the step incorporated into a range of sub-systems changes in technology that are now and instruments and applied in an often needed to compete. Companies increasing number of end markets who can apply proprietary technology in (see Figure 1). a range of market niches can justify the investment more effectively. Sales growth and profitability levels of sensor companies tend to be higher when Domestic sales often make up less they have capacity to supply complete than 20% of UK companies’ revenues sensor sub-systems. The markets for and exports are driven by sales to US sensor sub-systems are typically seven and European clients and increasing times the value of the sensor components. demand from Asia. Investments by UK Catalyst Corporate Finance LLP 2011 sensor companies in the emerging There are also a number of other important economies have tended to initially factors contributing to success: involve establishing regional sales and The industry is fragmented and made support teams. Acquisitions are being up of many small companies focused sought to establish local production to on niches. A key challenge for many UK match local consumption.
Industrial Electronics - Sensors M&A update A characteristic of many successful on evolving designs alongside clients businesses in the sector is that they will needs and delivering high levels Export led sales supply the same customers for many of reliability. years. Building those relationships relies key to growthKey growth factors expected to grow to $27 billion by 2016 ($18 billion in 2011). A good example We expect image of this is US based Omnivision, a majorThe rate of development of any specific producer of high precision and wireless sensorssensor market is determined by a range semiconductor image sensors to grow quicklyof factors. The key issues influencing (shipping 680 million CMOS imagenew market strategies, R&D investment sensors last year).budgets and M&A strategies include: Unlike the developed world, where The whole of the sensor market is many sensor markets are now mature, growing steadily with image sensors, the emerging markets (especially China) chemical / biosensors and position are experiencing much greater demand sensors being the fastest growing for sensors within consumer products niches (see Figure 2). In addition, as and vehicles. Consumption will continue wireless adoption rates pick up and to grow as the middle class in these standards harmonise, wireless sensors economies expands. are expected to become one of the fastest growing segments at an annual UK manufacturers have an impressive compound growth rate of over 45%. track record in developing so-called enabling technologies, which help to The increased use of smart phones and maintain performance advantages. tablets has resulted in a rapid expansion As chip level integration and wireless in image sensors. This market is Figure 2: Global Sensor Market 30,000 25,000 20,000 $ Millions 15,000 10,000 5,000 Catalyst Corporate Finance LLP 2011 0 2009 2010 2011 2016 Image, flow and level sensors Biosensor and chemical sensors Pressure and temperature sensors Position and load/torque sensors Miscellaneous sensorsSource: BCC Research
Industrial Electronics - Sensors M&A update connectivity advances, British companies like Sensata, which supplyUK manufacturers have businesses will need to exploit their high volumes of sensors into consumer expertise in MEMS / NEMS, photonics, products, have relocated over 90% of an impressive record radar and RF as well as systems their manufacturing to low cost in developing enabling integration and informatics. countries (Mexico, China and Latin America) over the last 10 years. technologies In higher volume end markets such as automotive, where lowest unit cost is the differentiator, there is huge pressure to relocate manufacturing out of developed nations. For example, Current Valuations The sensor and instrumentation market is often closely aligned with “UK businesses are attractive the wider industrials sector. Over the acquisition targets for US and past year though, our composite European acquirers in this sector” has out-performed the wider market Paul Vanstone, Director as a whole (Figure 3). Figure 3: Sensor & Instrumentation composite valuation index 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% Catalyst Corporate Finance LLP 2011 FTSE 100 Catalyst Sensor and Instrumentation IndexSource: Capital IQCatalyst Index: Cooper Industries, Danaher, Halma, Jenoptik, Measurement Specialties, Meggitt, Omnivision, Roper, Sensata, Spectris
Industrial Electronics - Sensors M&A update Figure 4: Comparison of average EV/EBITDA multiples Net debt Latest Net change Average Average % Change Revenue EBITDA Debt 2011 during 24 EV/EBITDA EV/EBITDA EV/EBITDA (£m) Margin % (£m) months FY 2010 Oct 2011 (2010-2011) Cooper Industries 3,239 16.8 252 -58.7 10.6 9.8 -7.5 Danaher 8,442 20.5 762 -46.5 11.7 12.6 7.6 Halma 518 22.3 37 -27.5 12.0 11.2 -6.6 Jenoptik 419 13.1 69 -58.6 16.5 5.6 -66.3 Measurement Specialties 130 18.2 31 -30.4 21.5 8.7 -59.5 Meggitt 1,162 24.9 730 -33.4 10.4 11.9 14.4 Omnivision 611 16.6 -270 78.4 16.7 2.8 -83.2 Roper 1,525 28.0 684.6 -1.7 12.6 11.5 -8.8 Sensata 984 28.3 894 -42.8 13.3 14.5 8.6 Spectris 901 18.9 87 -45.7 10.7 7.6 -29.3 Average 1,793 20.7 328 -26.6 13.6 9.6 -23.1Source: Catalyst Corporate FinanceTrade Buyer Activity Catalyst’s observations on current corporate activity are as follows: Acquirers payingThe sensor and wider instrumentation Large industrial groups continue to 8x EBITDAmarket has experienced relatively spin off lower margin businesses. for acquisitionsactive levels of M&A in recent years. This was demonstrated byIn addition to the many mid-market PerkinElmer’s recent disposal of itstransactions, there have been a number detection and illumination business toof industry changing deals. the Veritas Group.For example, in 2006 Texas Instruments (TI) Many buyers are focusing on thedisposed of its Sensors & Controls business mature markets of the US, UK and(renamed Sensata Technologies) to Bain Western Europe to source acquisitions,Capital, the global private equity firm, for to secure advanced technology and$3.0 billion. TI sold the business in order to established customer relationships.focus on high-growth core digital signalprocessing and analog semiconductor Whilst the more active acquirers havemarkets. Since then Sensata has spent over clear strategies to acquire in BRIC£470 million on four acquisitions in the US countries, they have failed to achieveand Europe, acquiring two Honeywell this for a number of reasons and optedautomotive divisions which were deemed for alternative entry / marketto be too cyclical by Honeywell. development strategies. We expect these companies to become moreLeading UK companies Spectris and Halma successful in these countries ashave also been particularly active in 2011, experience builds. BRIC acquisition Catalyst Corporate Finance LLP 2011completing four deals each. Spectris’sacquisition of Omega Engineering in the Recent trade deals have been strategies have largelyUS for £291 million follows its strategy to completed at a range of valuation levels, however some buyers have paid failed to materialiseacquire stand-alone businesses with similarcharacteristics to its own. up to 8x the current run rate EBITDA. to date
Industrial Electronics - Sensors M&A update Figure 5: Recent Sensors and Instrumentation M&A Deal Value Date Bidder Target Target Product line (£’m) First Sensor Manufacturer of pressure sensors for the Sept -11 SensorTechnics (Ger) 58.0 Technology (Ger) auto industry Manufacturer of measuring and Aug -11 Sensata (US) Sensor-NITE (Bel) 199.0 temperature sensor equipment Manufacturer of temperature and Aug -11 Spectris (UK) Omega Engineering (US) 290.0 measuring equipment Gas Measurement Manufacturer of advanced gas detection Aug -11 Battery Ventures (US) n/d Instruments (UK) systems Maxim Integrated Products Design and manufacture proprietary Jul -11 Sensor Dynamics (Aust) 100.0 (US) sensors Manufacturing of measurement and control Jul -11 M-Cap Finance (Fra) Gossen (Ger) n/d products for industry Calibration of pressure, temperature and Jun -11 Trescal (Fra) Antech Engineering (UK) n/d flow sensors WIKA Alexander Wiegand Manufacturer of pressure calibration Apr -11 DH Bunenberg (UK) n/d (Ger) equipment Manufacturer and supplier of health and Mar-11 Halma (UK) Medicel (Swi) 66.0 diagnostic equipment and sensors Provider of analysing and measuring Jan -11 Parcom Capital (Neth) Hobre Instruments (Neth) n/d equipment for the Oil and Gas industry Detection and Illumination Dec-10 Veritas Capital (US) business of PerkinElmer Manufacturer of lighting sensors 318.0 (US) Manufacturer of wireless sensors for Nov -10 Halma (UK) Alicat Scientific (US) 25.2 measurement Electronic instruments for the aerospace Oct -10 Astrium (Ger) Jena-Optronik (Ger) n/d industry Automotive on Board Oct -10 Sensata (US) Sensors business of Linear position and wheel speed sensors 88.0 Honeywell (US) Manufacturer of data acquisition Oct -10 Spectris (UK) N-Tron (US) 32.0 equipment for mission critical MIS Measurement Specialties Manufacturer of precision level and Oct -10 Pressure Systems (US) 16.0 (US) pressure instrumentation sensors Manufacturer of calibration and Oct -10 3i Group (UK) Trescal (Fra) 94.0 measurement service solutions Mine Safety Appliances Manufacturer of high tech gas monitoring Sept -10 General Monitors (US) 182.0 (US) and flame detection instruments Catalyst Corporate Finance LLP 2011 Provider and manufacturer of highly Aug -10 TransDigm Group (US) Semco Instruments (US) 46.0 engineered sensors Manufacturer and provider of heating and Jun -10 Chequers Capital (Fra) Thermocoax (Fra) 37.0 temperature measurementSource: Catalyst Corporate Finance
Industrial Electronics - Sensors M&A updatePrivate Equity million in 2011. Bain-backed Sensata has also followed a buy Private equity and build strategy.International Private Equity (PE) continues to beinvestors have been relatively active in Private Equity investors in the UK important forthe sensors market in recent years, have however been relatively quiet incompleting a fifth of all transactions this sector. Some of the characteristics global M&Asince January 2010. of typical sensor businesses have not been compatible with PE investment Battery Ventures, a multi-stage criteria. However, the opportunity to investment firm focused on technology execute a buy and build strategy in and innovation, acquired UK based such a fragmented market with the Gas Measurement Instruments in benefit of high barriers to entry, are August and Detcon (US) in September. expected to attract some sector Together the companies create a specialists. comprehensive portfolio of fixed and portable gas detection products with global reach. Buy and build 3i plc completed the secondary opportunities expected buy-out of Trescal, the former Air Liquide sensor and measurement to appeal to business, for £94 million. In the last PE investors year 3i has backed three acquisitions for the company resulting in Trescal increasing its turnover by over £30Prospects for M&A Market leaders have committed to an ongoing acquisition strategy targeted Companies seeking at bringing technology and productionIn 2010 transaction values and deal capability in-house. Streamlining complementaryvolumes increased and this trend hascontinued into 2011. Industry operations, reducing costs and the technologies are ability to shorten the productvaluations have recovered to 2007 development cycle are all high on expected to drivelevels (8x EBITDA in some cases) andwith a number of serial acquirers the agenda. continued mid-active, we expect further consolidation Recent economic uncertainties have market M&Ain the mid-market. seen sensor and instrumentation companies focus on markets that theyRecently the industry has been focused on understand, maintaining sales channelsinvesting in niche high margin businesses that fit with established strengths.with international scale as well as divesting However the drive towards scale andnon-core high volume businesses developing an international footprint willgenerating low margins. encourage the industry trend of seeking out complementary Whilst drivers for growth do remain, in technologies. This is borne out by M&A the short-term the macro environment figures suggesting that the majority of Catalyst Corporate Finance LLP 2011 is presenting challenges. For example, deals have been under £100 million. the recovery in the automotive sector is applying pressure on the sensor industry to lower its unit cost and develop products that combine low power consumption with high performance.
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