Auto components, specialized logistics projected to see steady M&A

This is an excerpt from the pipeline explorer column discussing likely sponsor exit transactions based on Mergermarket’s Likely to Exit predictive analytics, which assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.

This version of the Explorer concerns companies operating in the automotive injected molded plastics, auto drivetrain components, and specialty logistics/warehousing industries. 

Although automotive components is a notably cyclical sector, M&A activity is expected to remain steady in the space over the next year.

This trend should hold true even for providers serving internal combustion engine (ICE) vehicles versus greener electric vehicles (EVs), which tend to interest investors more.

A sector advisor noted that, despite the growing popularity of EVs, the timeline estimated for cars to become totally electric is roughly 2050, and there is still overwhelming demand for ICE vehicles. Hence, companies providing drivetrain components to tier-1 automotive manufacturers will see continued interest, he added.

He cautioned, however, that most of the acquisitions will come from private equity firms, as many strategic groups are mandated not to invest in non-EV components or are generally laser-focused on increased exposure to renewable energy. Financial suitors are less wary of exposure to the ICE parts space but will still offer discounts to historical multiples.

Businesses servicing large tier-1 original equipment manufacturers, which have historically been valued at 5x-6x EBITDA, will likelier trade for 3x-4x, he estimated. On the other hand, those serving the less-cyclical aftermarket space could sell for 7x-9x EBITDA compared to historical highs of 10x, he added.

ATC Drivetrain, a portfolio group of Crestview Advisors since early 2018, considers itself a potential near-term takeout target, according to a June report by this news service. The company, which marketed itself on USD 25m in LTM EBITDA and LTM revenue of USD 150m in its 2018 sale, has more than doubled those figures and has significant scale to command a healthy multiple, though it is not actively seeking a sale and is likely to ramp up through more acquisitions before exiting.

ATC is particularly attractive because its products are used in ICE, EV, and hybrid vehicles; it wants to service all three fields “regardless of the pace of adoption from ICE to EV,” according to the report.

ATC has an LTE score of 74, weighted heavily by its hold period of more than 2,000 days and the fact that its last bolt-on acquisition was nearly two years ago.

Elsewhere in the automotive sphere, injection molded plastic will see steady multiples because of demand for lighter automotive materials like plastic and aluminum, which are used by electric and ICE vehicles, said Chuck Peterson, co-founder and managing director of Pathway Partners. That said, the uptick in interest rates as well as fear of exposure to the cyclical automotive space may lead to lower-than-usual valuations, he added, estimating that lower-end businesses could fetch 4x-6x EBITDA while ones with stronger customers—or specialized, secondary services—could sell for higher amounts.

For example, Davalor Mold, a maker of injection-molded plastic parts acquired in 2016 by Blackford Capital, is attractive because it assembles its own molds and does more complex injection molding than standard companies in that space, said Peterson, whose firm represented Blackford in the Davalor acquisition.

A recent story by this news service said that, while Davalor is generating the same revenue range as it did upon its 2016 takeover—USD 25m to USD 50m—it expects a significant boost soon, likely through bolt-on acquisitions, and isn’t in a rush to exit. Davalor was one of several businesses placed into Blackford’s Michigan Prosperity Fund, which tends to hold companies for six years, or longer if they are underperforming.

Davalor has an LTE score of 54, most heavily influenced by the near-seven-year hold with Blackford.

Peterson said it would make sense for Blackford to hold Davalor for a while as it probably merits a higher multiple than can be offered now due to the soft state of the markets.

In hotter, less asset-intensive industrials sectors like logistics and warehousing, however, valuations are high enough now that consolidation could be expected in the very near term.

For instance, MicroStar Logistics, which offers specialized keg logistics services to beer brewers, was on the verge of selling when COVID-19 hit; the business, held by Freeman Spogli for the last decade, took a tremendous hit, but over the past three years, it has significantly diversified its business model and returned its EBITDA to 2019 figures of roughly USD 60m, hence it is weighing a near-term exit, according to a recent Mergermarket report.

MicroStar’s LTE score is 72, having been held nearly three times the benchmark hold period. It has not made a bolt-on acquisition in 839 days, compared to a benchmark of 500 days.

Below are the companies with the highest LTE scores in the subsectors of Auto/Truck, Construction/Building, Machinery and Metal & Steel.