Following a sixth year of consecutive growth in transaction volume, the M&A market for industrial distributors experienced a softer than expected first half in 2016, registering only 337 completed transactions in the PMCF Industrial Distribution Index – a 15 percent decline from the same period in 2015. This trend also has proven true for the broader M&A environment, with strategic and private equity activity down throughout the middle market and elsewhere.
Several key variables in H1 served to subdue general market activity. In January, the threat of a continued rise in U.S. interest rates and weak Chinese growth prospects contributed to a contraction in the global credit and equity markets, sending debt issuances to historic lows and virtually halting the availability of second lien financing. In addition, increasing clarity with regard to the outcome of political elections in Britain and the U.S. generated unrest among investors worldwide. The high risk profile of the market was enough to keep many would-be acquirers from committing capital, and interest was further tempered due to the dearth of quality deals being brought to market.
Despite these headwinds early in the year, equity markets have rebounded and credit availability has returned to levels suitable for deal making in the middle market. Leverage multiples employed by U.S. private equity groups remained elevated at 5.5x EBITDA and deals valued below $100 million continue to attract significant interest, accounting for nearly 70 percent of H1 2016 activity. Fundamentally, the economy appears to be trending to the positive, especially for distributors. Indicators such as the ISM Production Index, Purchasing Managers Index (“PMI”), and ISA Distributor’s Index suggest a period of expansion in the first half of the year. The ISM Production Index registered 54.7 in June, well above the 12-month low of 49.9 in December. The PMI reached a YTD high of 53.2, indicating a fourth straight month of expansion in the manufacturing sector. Housing starts continue to trend upwards and distributors in the building products space are benefitting from a prolonged period of growth in residential construction.
Amid various global uncertainties many economic data points relevant to the M&A cycle show support for healthy levels of continued acquisition activity. The availability of cheap debt and robust levels of equity capital favor both buyers and sellers, as do improving business metrics across the manufacturing and distribution industries. Although current deal volumes suggest the market has peaked, PMCF maintains its position that differentiated sellers in the middle market will benefit from strong industry fundamentals and can realize attractive value outcomes at current financing levels.
Read Industrial Distributor M&A Pulse Q2 2016 Full Report