German M&A Trends in Industrial Manufacturing and Automotive Sectors: 2022 Mid-Year Update

Automotive

Supply chain disruption and a shortage of skilled labour continue to hamper the ability of original equipment manufacturers (OEMs) to meet the demand for new vehicles, and 2022 has brought new challenges. The Russia–Ukraine conflict has exacerbated production and supply chain difficulties, mainly for European automotive companies. Inflation, high energy prices and the rising cost of raw materials such as nickel and steel are increasing production budgets and creating downward pressure on margins for suppliers.

Given the current macroeconomic and geopolitical environment, it is unsurprising that M&A volumes and values declined in the first half of 2022. However, we see strong demand among OEMs to acquire technology as the shift continues to e-mobility and away from the production of internal combustion engines (ICE). Specific deals to address supply chain issues and skilled labour shortages or to gain access to key raw materials, such as critical minerals for batteries for electric vehicles (EVs), are likely. We expect OEMs to optimise their portfolios, divesting non-core assets and investing—often via their own venture funds—in promising new technologies.

For suppliers in the challenged powertrain sector, the M&A focus will likely be on consolidation. There is a number of distressed assets, particularly in Germany and Italy, for which it is challenging to obtain further funding or to find a buyer. Concerned about high levels of exposure to the automotive sector, lenders are likely to exercise much more caution, which could impact the ability of those companies to refinance debt in the next six months. As a result, we expect that more distressed M&A and restructuring activity may occur in the second half of the year, when some companies will need to renegotiate the COVID-19 funding received during 2020.

Germany Automotive M&A 

The M&A activity in the German automotive industry remained robust in the first six months of 2022 with a total of 33 deals done which, however, is still a decline of 18% compared to 2021 (40 deals). Compared to other industries, automotive was mainly dominated by strategic investors with only c. 25% of deals having private equity (PE) involvement. In terms of geography most buyers came from within Germany (18) – 22 in total from within Europe – with the second and third largest buyer group located in the US (5) and Japan (3). When looking at M&A targets, both domestic and abroad, of German OEMs and suppliers we noted a clear focus on assets in the autonomous driving and related software field with deals such as Robert Bosch acquiring Five AI, Daimler Truck investing in Apex AI and the planned acquisition of Huawei’s autonomous driving unit by VW. However, other notable acquisitions also included Mercedes-Benz acquiring a minority stake in batteries manufacturer ProLogium or SAF-Holland launching a tender to acquire the remaining stake it did not yet own in Haldex.

During the first months in 2022 we experienced a continued high deal activity in the parts & components manufacturing segment with 11 deals conducted. These deals included a variety of acquisitions, from distressed assets like AAM acquiring Tekfor or Winning Appliances acquiring PWK Automotive, to innovative assets in the E-mobility space like Valeo acquiring the remaining 50% shares in their JV with Siemens (Valeo Siemens eAutomotive) but also assets with universal applications like Aequita acquiring the electronic interfaces business of ZF or Lear acquiring I.G. Bauerhin, a manufacturer seat and interior heating. The largest transaction in the space was the final execution of the put option of Bosch to sell its 20%-stake in the JV to Knorr-Bremse. Going forward we expect to see similar patterns with distressed assets, mainly in the ICE segment, but also assets that offer exposure to relevant technology in E-mobility etc. will come to market.

The retail & wholesale sector is showing further good deal flow with 9 transactions. We saw transactions in ‘traditional’ parts and accessories assets like the acquisition of MTS (MarkenTechnikService) or MAPCO Autotechnik but also the acquisition of a minority stake by an investor group in Pepper Motion, a supplier of green mobility solutions and retrofitter of commercial vehicles, underpinning the increased awareness and interest in innovative sustainability solutions.

On average over the last 4 years 15 deals were done per annum in the dealership sector. Until June of this year we saw a continuation of this trend with 8 transactions conducted so far. Further strong deal flow in this space is to be expected as OEMs are increasingly looking at reducing their dealership network in favour of online sales channels and agency models. Additionally, pure online dealerships like Auto1 or Cazoo, buoyed by the pandemic, are further creating competition to the ‘legacy’ model of many auto dealers.

We saw a slow start to the year for the vehicle manufacturing sector with only 3 deals with German targets, most notably the acquisition of the 65%-stake in Tropos Motors, a manufacturer of electric commercial vehicles for urban and rural areas, by US-based Cenntro Electric. 

Business services

M&A activity in the business services sector is strong, and deal multiples remain high for assets that are focused on tech-enabled delivery models. The pandemic accelerated the transition from traditional to tech-enabled services, and demand has continued to increase for capabilities that can digitalise workflows and deliver higher-quality services more efficiently. An example for this is Products Up GmbH, a company that offers a SaaS platform to simplify the handling of content for digital marketing and shopping channels. While the deal volume is high, most transaction are not very sizable (single digit or lower double digit €m). 

The demand remains high for outsourced services, as labour shortages continue, and business leaders seek to acquire key capabilities and divest or outsource parts of their business. We are seeing more creative models of service delivery with the purpose of focusing more on value rather than growth as a strategy.

The trend to outsource rather than insource is also reflected in the fact that private equity was the most dominant buyer group in the first half of the year with 46 out of 81 deals. This PE dominance can be observed across sub-sectors except for the refuse system service category, where about ¾ of the buyers were corporate.

In many non-tech business services, we expect to see further consolidation, especially in highly fragmented markets such as refuse systems services or consulting services. In the first half of 2022 corporates consolidated 8 refuse system assets and 12 business and management consulting assets. 

We expect that most M&A activity will be regional and may result in the creation of a few dominant regional players. In the first half of the year the corporate deals were predominantly local and regional deals. Out of the 35 corporate deals 20 where DACH buyers and almost all European.

Germany Business services M&A 

Business services stands out as a very active market with 81 deals on German assets in the first half of 2022. The investors’ interest remains very high in German professional services firms (44 deals) and is also significant in refuse systems (11 deals), consumer services (11 deals), and industrial services (9 deals).

The professional services include business advisory firms, such as SCHICKLER Unternehmensberatung GmbH, as well as narrowly focused services, like sustainability consulting, e.g., akzente kommunikation und beratung GmbH which was bought by Accenture. In refuse systems the category hazardous waste treatment and disposal was most dominant. In one of the transactions ArcelorMittal SA bought ALBA electronics and metal recycling. An example for a consumer services asset is Grover Germany GmbH, which rents out consumer electronics and appliances to consumers. A well-known buyer of industrial services is Bosch Sicherheitssysteme GmbH, who acquired the intelligent building automation provider Hoerburger AG.

Engineering and construction

The engineering and construction market continues to face global supply chain disruptions, rising commodity prices and skilled labour shortages, all of which are contributing to project delays and increasing pressure on already tight margins. The sector’s low margins don’t make it particularly attractive to PE buyers, and we saw a softening of M&A volumes in the first half of 2022, mainly due to fewer PE deals

Public investments and infrastructure funding, such as the EU’s NextGenerationEU recovery plan, will bring additional funding for roads, bridges, and other construction projects. Although the funding will be spent over time, we expect this will nonetheless provide a boost to M&A activity in the short term.

As fewer and fewer companies provide both engineering and construction services, preferring instead to focus on the one area in which they have strategic capabilities, we expect those that still offer both to review their portfolios and divest non-core assets to free up capital and management’s time to focus on their core business.

Looking forward to the remainder of the year, we expect smaller strategic deals will take place among corporates looking for regional consolidation opportunities and cost synergies. For some, this involves bolt-on acquisitions of innovative technologies, especially in the green energy space, or the acquisition of specific technical capabilities, such as engineers and new-technology experts.

Germany Engineering and construction M&A

Deal activity in the German engineering and construction market declined by c. 20% in the first six months of 2022 to 49 deals compared to 62 in 2021. The hardest hit was the construction sector with a more than 30% decline in deal activity (19 deals in 2022 vs 28 in 2021). Meanwhile, the engineering services deals also saw a strong decline with 17 deals in 2022 vs 21 in 2021 (-20%). Additionally, there were few other deals among construction materials (8), residential construction (3) and construction machinery (2). In terms of buyer’s universe, the overall market was dominated by corporates (35 deals), mostly from Germany (19 deals), with the second and third largest buyer group located in Switzerland (4) and Spain, Sweden, and Austria (2 each).

The construction deals were dominated by four deals of power and communication construction companies and four deals of plumbing, heating and air-conditioning contractors, including the IK Investment Partners acquisition of Müpro, the distributor of pipe-related fasting technology and engineering solutions, from Perusa Partners.

The engineering sector had a strong start of 2022, with deal activity reaching 9 deals in January. Over the first six months, there were 17 deals, 16 of which were engineering services companies deals, including the acquisition of Ruetz Systems Solutions by the DBAG portfolio company, in-tech. There was only 1 architectural services deal.

Industrial manufacturing

As large consumers of energy and commodities, many manufacturers have been particularly impacted by higher energy prices and the volatility of commodities markets and have been experiencing significant increases in other cost inputs such as labour.

Inflation is making it difficult for dealmakers to accurately forecast costs and margins, which will likely result in a more conservative view of value. In this context, many players are working on pricing strategies and joint ventures and alliances to defend their share of the industry profit pool.

Supply chain disruption also remains an issue for many companies, and we expect it will lead to targeted M&A as business leaders seek to build greater supply chain resilience. We also are seeing some companies looking to invest in different parts of the value chain to better react to the volatility of the markets and defend their margins. This could be either backwards vertical integration to secure control over key inputs or downwards vertical integration to gain more control over the distribution channel. A tightening regulatory environment in the US, UK, EU, and several other countries may also lead to dealmakers undertaking smaller deals to avoid the regulatory scrutiny that larger deals often bring.

Technology remains a priority focus area for the industrial manufacturing sector, with M&A being used to acquire innovative and technological capabilities, such as autonomous software and other new digital technologies to help to improve industrial processes, business results and safety. We see a clear path towards new investments in automation and AI applied to industrial processes, with a strong convergence between technology and industrial manufacturing in specific niches such as agricultural machinery.

We expect to see value preservation strategies employed by large corporations to maintain the level of their cash flows. Where inflation may create negative real returns on investment in the short to medium term, this could trigger further strategic portfolio review and divestment of non-core assets.

ESG concerns continue to gain attention among business leaders, with companies looking to invest in green solutions, such as green chemicals, green cement and sustainable building products, and dealmakers building ESG criteria into their investment strategies.

Germany Industrial Manufacturing M&A 

Deal activity in the German industrial manufacturing market remained strong despite a decline of 34% in the first six months of 2022 compared to 2021. The year started strong with 17 deals in January 2022 (vs 16 in January 2021) but due to the start of the Russia-Ukraine conflict and the macro-environment, mainly the increase in energy prices and the volatility of commodities markets, the deal activity declined in March 2022 to 8 deals (vs 25 in March 2021) and further down to only 3 deals in April 2022 (vs 9 in April 2021). The deal activity picked up again to 16 deals in May 2022 (vs 15 in May 2021) but sharply declined again in June 2022 with 5 deals vs 15 deals in June 2021.

The deal activity in the rubber and plastic products sector saw the largest decline of 53%, followed by the fabricated metal products (40%) and electronic and electrical equipment (29%) sectors.

The buyer’s universe was dominated by corporates (60%) mainly from Germany (16) followed by Sweden (4) and the Netherlands (4), with only 8 deals by corporates from outside Europe. About 40% of the deal activity saw PE involvement, mainly by financial investors from Germany (9), while the rest of the financial investors were Europeans (11) and North Americans (4) with only one being situated in APAC (India).

The electronic and electrical equipment sector, which is usually the most active in terms of deal activity in the industrial manufacturing market, has seen a decline in deal activity with only 24 deals in the first six months of 2022 (vs 34 in 2021). There were seven deals of manufacturers of storage and primary batteries, including the acquisition of Fazua, battery storage specialist and manufacturer of compact drive systems for e-bikes, by Porsche, another example of corporates investing in different parts of the business and refocusing into technology and ESG.  

While Siemens continues to carve-out and divest non-core assets to allow them to become more competitive as standalone companies in their specific markets. In 2022, Siemens sold its Commercial Vehicles Electric Propulsion Business, which supplies electric drive systems and solutions for medium and heavy-duty commercial vehicles, for €190m to Meritor, the USA based supplier of drivetrain, mobility, braking, and electric powertrain solutions. Similarly, ams OSRAM, a global leader in optical solutions, sold its Automotive Lighting Systems business to Plastic Omnium for €71m and its Digital Systems business to Hangzhou Inc for €78m.  

Deals involving industrial machinery producers saw strong deal activity (23 deals) in the first six months of 2022 which, however, was still a decline of 21% compared to 2021 (29 deals). Most of these deals involved specialized industrial machinery players (5 deals), including the sale of the pressure vessels manufacturer, Borsig, to a financial investor (Vorsprung) for €220m and the sale of MANN+HUMMEL’s High-Performance Plastic Parts business to Mutares. Followed by 2 deals of manufacturers of machines for the service industry, including the sale of Knoll Maschinenbau to Alliance Automotive Germany, an automotive parts distributor. Other notable deals include the sale of Pumpenfabrik Wangen, the pumps manufacturer, by Silverfleet to Atlas Copco, a Swedish manufacturer of air compressor equipment and INDUS’s acquisition of 70% stake in Held Industries, a supplier of special machines and systems for precise laser cutting and welding.

There were 9 deals of fabricated metal producers which were mainly small-mid size companies, some with financial difficulties being acquired by strategic and financial investors. One example is Räuchle, the manufacturer of fabricated structural metal products, who filed for bankruptcy due to the global chip shortage, and later was acquired by Winning Group, a German-Czech automotive and construction business.

Similarly, the rubber and plastic producers’ deals were also dominated by small-mid size deals. The sector had the lowest level of deal activity in the first six months of 2022 with seven deals (vs 15 in 2021), mainly in the plastic-products area.