Ambitious UK Manufacturers Chasing Deals

UK manufacturers are scurrying to make acquisitions on the back of a strong period for international trade and as more uncertain times loom.

The beginning of 2018 has generally been buoyant for global manufacturing. Both production and orders grew across the world in the first and second quarters of the year of the back of healthy economic activity and trade in general. Having said that, growth in the second quarter has been slower than in the first, and in April, manufacturing output fell by 1.4 per cent, according to the Office for National Statistics. This came as somewhat of a surprise as economists widely expected 0.3 per cent growth.

Despite this, many UK manufacturers - and especially those smaller players who sell into larger operations’ supply chains - are feeling confident enough to be embarking on M&A activity.

Why M&A?

There are a number of reasons why manufacturers are turning to acquisitions right now. A major reason is simply to help them expand and meet demand during a relatively healthy economic period internationally, while another is to create economies of scale. Some could be looking to sweep up competitors to strengthen their position within their particular marketplace.

Economies of scale

One business citing economies of scale as its main reason for M&A activity is ID Design Group, which makes cards and gifts. The business reported a five per cent increase in revenues to £327.5m in the 12 months to the end of March 2018, while pre-tax profits soared by 50 per cent to nearly GBP20m.

ID Design Group said it was eyeing up M&A opportunities despite the cost of materials increasing, adding that the ability to operate at scale was the driving force behind its decision to acquire other businesses. Analysts at Berenberg predict that earnings at the firm would be reflecting the rewards of the business’s “clear appetite for acquisition” by 2020.

ID Design chief executive, Paul Fineman, stated: "With the effective combination of our product and brand portfolio, together with an array of value adding services, we remain very well placed to continue to grow organically, across all regions and channels.

"This, together with carefully considered M&A opportunities supported by an ever strengthening balance sheet, provides a very bright future."

Reducing competition

Meanwhile, an example of a manufacturer reaping the rewards of its role feeding into larger manufacturers is TT Electronics, which just bought a smaller rival Stadium Group for GBP46m. TT supplies parts to the automotive, aerospace, medical and defence industries. The business is now expected to embark on more M&A activity to keep the momentum going on a period of strong profitability.

Another manufacturing firm busy making deals is Hindley Circuits, the two-year-old PCB and assembly services firm, which has just announced its second deal within a matter of months. It has purchased Irridian Industrial Electronics. The deal, alongside its previous acquisition of Magnum Electronics, is part of the firm’s plan to turn over GBP10m a year within five years of its inception.

Hindley’s CEO, Richard Whitehead explained: “It is important that we strive to deliver the very best services to our customers and through having a full end-to-end offering combined with post warranty support, we can add real value.”

British manufacturer Volex is also focusing on M&A as a route to growth and profitability at the moment. The company manufactures cables and has struggled to improve sales due to heavy competition and the fact that it supplies to a relatively small number of large international customers. Now, following a gradual turnaround and return to modest growth thanks to the input of shareholder Nat Rothschild, it has purchased MC Electronics, a cable assembly manufacturer. It is also involved in a deal to buy cable and electronic sub-assembly manufacturer Silcotec for £36m.

Expanding geographically

Other British manufacturers are setting their sites on acquisitions elsewhere in the world to try to make the most of some pretty favourable market conditions. Mettis Aerospace’s CEO, Gordon Fraser, stated: "Long-term agreements are in place with many customers which gives the company excellent visibility of future demand and growth. Overall growth in demand is still expected to average around five per cent for both passenger and cargo traffic.”

As a result of this, the business, which supplies aerospace components to major players such as Boeing and Airbus, is now looking for acquisitions in the UK, but also in Europe and in the US. It’s pre-tax profits have almost doubled over the past year to over GBP10m.

TT Electronics, a component manufacturer based in Woking, has been snapping up US manufacturers in order to further extend its reach across the Atlantic. Its latest acquisition was of Minneapolic-based Precision Inc., which manufactures electromagnetic products used by a range of industries.

TT Electronics’ CEO, Richard Tyson, stated: “The acquisition of Precision is an excellent fit with both our business and our strategy for growth and higher margins.

“It has a strong position in markets where the proliferation of electronics is increasingly important."

Conclusion

Growth-oriented British manufacturers are turning to M&A as a means of strengthening their position in the marketplace at a time when the going is relatively good. CEOs across the industry seem often genuinely surprised that market conditions seem to be positive despite the cautious atmosphere caused by political factors.

Gordon Fraser sums it up as follows: "We are in a good financial situation considering global uncertainty over issues such as Trump and Brexit.”

However, they are, perhaps, anticipating less favourable times ahead, as trading climate uncertainty looms with both the US and EU. In light of this cloud on the horizon, M&A is an obvious way for many businesses to bolster themselves. After all, the stronger position a manufacturer has, with regards to economies of scale and where it sits on its competitor matrix, the better its chances of surviving forthcoming challenges.

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