European LED Lighting: Consolidation set to surge as spotlight on sustainability, ESG bolsters demand

• European landscape ripe for M&A
• Private equity profits from mature, fragmented market; Ardian, Ambienta keen consolidators
• Smart lighting, horticultural LED applications peak investor interest

Demand for LED lighting is reaping the benefits of the global push towards sustainability and energy efficiency, in turn setting the stage for further M&A in a matured but highly fragmented sector, several dealmakers told Mergermarket.

“LED as a technology created huge disruption in the lighting sector a number of years ago, with the emergence of hundreds of new market entrants, with large traditional lighting players slow to adapt. As a result, today we have a completely different competitor landscape globally and a highly fragmented sector, which has been consolidating in recent years and continues to do so,” according to Alastair Rogers, managing director at Raymond James.

Government initiatives aimed at limiting or banning inefficient lighting, such the UK’s announced ban this week on sales of halogen lightbulbs from September as part of wider legislation to cut carbon emissions, coupled with increasingly innovative tech applications, are providing a boost to the M&A pipeline after a rather subdued 2020.

Amidst the coronavirus pandemic, M&A activity in the European LED space saw a significant dip last year, with deal volumes falling from 26 deals in 2019 to 14, according to Mergermarket data. However, YTD figures paint a more positive M&A outlook for 2021, with eight deals worth a combined EUR 1.4bn announced so far, putting this year on a strong course to outpace 2020.

The acquisition in May of German lighting major Osram by shareholder AMS AG  in a deal worth EUR 1.3bn is testament of the strength of European activity in the LED space. Other deals announced include Triton-backed Norwegian lighting products manufacturer Glamox’s acquisition of domestic LED lights specialist Luminell Group for EUR 13.8m in April, and Irish industrials group Kingspan Group’s purchase of SMAC-sponsored LED player Skydome earlier in the year.

While the majority of activity in Europe has been conducted by other European bidders, cross-border dealmaking appears to be slowly rebounding. US-based bidders have been involved in two deals so far this year as well as one Chinese-led deal, after no cross-border deals were announced in the space in 2020.

Europe to light the way for consolidation

As more energy directives come into force and corporates look to boost their ESG credentials, Europe is seen as a hotbed of M&A activity, with strategics and sponsors vying for their share of the pie, according to sector dealmakers.

Coupled with strong underlying growth, the European market could benefit from a natural substitution effect that could lead to consolidation. “There is a significant amount of the current European lighting stock that is legacy lighting, still to be replaced by more sustainable LED lighting,” Matt Norrington, principal at sustainability-focused private equity firm Ambienta, said.

Players eager to consolidate the European market include a hybrid of private equity-backed LED companies, such as Collingwood, a UK-based LED player acquired by Ambienta in February, and listed strategics eager to consolidate, including UK-based Luceco and Sweden’s Fagerhult, Norrington said.

Fagerhult acquired Seneco, a Danish maker of street lighting products, in April for an undisclosed amount.

European companies are also likely to attract acquisitive US strategics such as Leviton, a manufacturer of electrical wiring products that acquired UK LED-focused lighting firm JCC in 2013; and US lighting solutions provider Acuity Brands, Norrington said.

Acuity Brands on 4 June agreed to acquire ams Osrams’ Digital Systems business.

Far Eastern buyers keen to acquire and scale European lighting players of a “decent size” are also likely consolidators, Norrington said. However, there is little risk of cheap overseas labour or products, particularly from Asia, flooding the market as European LED players perform well on design excellence and branding, earning the trust of key decision-makers such as wholesalers and electrical installers, he said. “For over a decade, European players have outsourced product manufacturing to partners in Asia while retaining product design, marketing and branding capabilities in-house, which creates high barriers to entry,” he noted.

Private equity’s lighting playbook

The sector fragmentation created by the emergence and widespread adoption of LED technology has led to a fruitful hunting ground for private equity firms who have been backing buy-and-build platforms, Raymond James’s Rogers said.

The emphasis on corporate ESG initiatives is also driving buyout groups, according to Matthias Breuckmann, director at Ardian. “As the assessment of ESG criteria is becoming increasingly critical in the wider analysis and valuation approaches for private equity, the LED sector clearly stands to benefit from this trend”. While the industry is favourably positioned to make significant changes from an ESG standpoint, PE investors will be selective and look closely at an individual company’s commitments to ESG, both in terms of direct and indirect policies, he added.

Ardian has been active in the space following its 2016 takeover of Germany’s SLV, one of the largest private European lighting players, with SLV’s acquisition of Italy-based commercial luminaries firm Novalux in 2019, and is keen to engage in further M&A. “We see immense opportunity in a space that we consider to be highly attractive and will look to deploy additional capital into businesses demonstrating suitable strategic positioning and profiles,” Breuckmann said.

Alongside Ambienta’s Collingwood and Triton’s Glamox investments, recent sponsor-led deals include Clessidra’s 2019 acquisition of a majority stake in Italian LED lighting solutions provider L&S for an estimated value of EUR 100m, and Investindustrial’s 2018 partnership with Carlyle to acquire Denmark’s Louis Pouslen and Italy’s B&B Italia and Flos to create a group with combined sales exceeding EUR 500m, as announced.

Another attraction is the scope for cross-selling and cross-fertilization of products, with plenty of opportunity for new product development and procurement opportunities through sourcing, as well as in the repair and maintenance market, Ambienta’s Norrington said, adding that the firm will look to expand its presence in Europe through more buy-and-build plays in the space following the Collingwood acquisition.

Largest European LED lighting M&A deals (2016-YTD 2021)

Deal-driving tech trends  

As LED technology advances, increasingly innovative applications are gaining market traction, including trends around “human-centric” lighting used in hospitals, schools and homes to improve concentration and aid sleep, and “smart lighting” for data collection and analytics in the commercial and industrial sectors.

The emerging smart lighting trend is also driving some dealmaking, with further M&A expected. “Smart lighting is becoming an increasingly important feature of deals. Larger players have been buying up smaller businesses for their technology,” according to Tom Bates, Associate at Raymond James.

The overall LED sector has been growing on average 10% per annum globally over recent years. Smart lighting will grow faster than the sector average because it is coming from a low base, Raymond James’s Rogers added.

LED used in horticulture, particularly indoor and vertical farming, is another trend gaining momentum. There is a significant gap in the market for LED-based technology in the horticulture sector, according to Prashanth Makarams, CEO of Crocus Labs, a German agritech start-up that provides energy-efficient smart lighting solutions for indoor farming companies.

“We’ve seen through due diligence that around 75% of vertical farms are not profitable. Operating costs at major European and US players are extremely high. Our LED luminaire and semi-conductor diode technology can help companies meet the required profitability,” he said.

Consolidation of LED technology providers like Crocus Lab is likely to take place as sponsors and strategics target energy efficient solutions, Makarams said. “Greenhouse and container farm manufacturers are acquisitive, as are listed players like Osram and Phillips. They want the edge in the market and will be interested in acquiring companies like ours.” Crocus Labs has also received approaches from several private equity firms, Makarams said, adding “private equity is keeping an eye on us.”