High multiples and attractive dynamics attract PE firms to flow control sector

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After seeing a number of attractive strategic deals in the pump and flow control technology segment over the past 12 months, private equity firms are becoming active buyers themselves, four industry bankers and an industry source told mergermarket.

One of the highest profile deals was the USD 5.23bn Tyco Flow Control/Pentair deal, which was the Tyco spin-off of its Flow Control division into a merger with Pentair. The Tyco/Pentair deal shows PE sponsors that there is an “active strategic buyer universe” to whom they can sell, said Christopher Haymons, managing director at St. Charles Capital. Haymons recently advised PE fund Platte River Equity on its purchase of WellMark, an oil and gas flow control company.

In addition to an active strategic buyer universe and general consolidation in the sector, “the highly engineered nature of flow control products, strong end markets and high barriers” is driving PE interest, according to a report by UK-based Catalyst Corporate Finance.

The US has led in terms of global deal volumes in the more than 500 deals concluded worldwide in the sector during the past five years, driven by serial acquirers like ITT and National Oilwell Varco and a wealth of targets, according to the report. PE firms have been involved in 15 of the 89 transactions that have taken place in 2012, the report said. In North America, there were nine deals in the sector valued at USD 5m or more by private equity firms in the year to date through 17 December, compared with only three in the year-earlier period, according to mergermarket data.

PE can buy low, sell high

The Tyco Flow/Pentair deal was “richly valued” and encourages PE firms to take advantage of “multiple arbitrage” to buy a platform company at a low multiple and build it up. The deal valued Pentair at around 18.9x 2011 EBITDA, and 1.5 times 2011 revenue, according to the mergermarket database. Multiples for flow control acquisitions have ranged from 8x to 12x, Haymons said. A second industry banker agreed and noted that larger companies were able to command higher multiples.

Flow control businesses have been seeing heavy private equity interest this year. ZS Fund just sold Smith-Cooper to Blue Point Capital, a nice-sized transaction, said an industry banker. High-Pressure Equipment Company was sold in July to Wasserstein. Harvest Partners just bought Columbus, Ohio-based FCX. There is a lot of interest in these businesses as “a way to play oil and gas,” the banker said. Multiples are “directionally high” and should remain at rich levels, he said. “Leverage is nice. It’s not capital intensive. A brand goes a long way in these industries.”

Steve Maxwell, founder of TechKNOWLEDGEy Strategic Group, which focuses on advisory, including M&A, for the water resource industry, agreed that the pump and flow-control is seeing a lot of M&A interest but said one drawback of investing in manufacturers of pumps and valves is that profits are steady, but not as high as they would be in other industries. A typical return-on-investment in the pumps industry is between 6% and 10%, he said. Some PEs are seeking a 15% to 20% return on investment, Maxwell said. The flow control industry provides “continual, predictable” growth over the long term, Maxwell said, but it is not at “drastic” rates. When the economy is booming, flow control is not an “exciting” industry. When the economy is down, however, it can look attractive.

Although not all end-use segments will see high levels of activity, said Haymons, flow control technology related to the oil and gas, utilities, and water infrastructure industries should continue to attract PE attention.

Water infrastructure equipment attractive

PE firms detect opportunities in water due to the poor state of infrastructure in the US, including water management systems, Maxwell said. Indeed, the Congressional Budget Office has estimated that USD 1tn in investment is needed in water management nationwide, he noted. In addition, the strong activity in the oil/gas market, including in horizontal drilling, could also push deals to be made, Maxwell said.

Potential PE firms that could be buyers due to their interest in water management include The Carlyle Group, Clayton Dubilier & Rice, Windjammer Capital, Tonka Bay Equity, Graham Partners, Sail Capital, Thomas H. Lee Partners and Blackstone, an industry source said. Potential strategic buyers include GE, Siemens, Danaher, Deere & Co. and Heckmann, the source added.

As for potential targets, there are “not too many,” the industry source said, but he mentioned Calgon Carbon Corporation and Aqua America, a builder of pump systems for municipalities.

Many PE firms are investing in flow control because they believe that oil and gas in North America is a growth story, said Haymons. Meanwhile, flow control companies are less sensitive to rig count levels, which are currently on the way down, because their technology is primarily used in production and not exploration, where drilling activity is highly cyclical.

Haymons identified North Carolina-based SPX as a strategic buyer in flow controls, noting its purchase of ClydeUnion Pumps Limited in 2011 and its current pursuit of Gardner Denver. SPX paid USD 1.155bn for ClydeUnion and could bid up to USD 3.92bn for Gardner Denver, according to reports by this news service. Haymons also singled out UK-based The Weir Group as a bidder for its sizable oil and gas segment following its acquisition of Seaboard Holdings in 2011.

Other international consolidators include Atlas Copco and Flowserve, according to Catalyst Corporate Finance.

A fourth industry banker pointed out that a lot of private equity groups are playing flow control by getting into hydraulics, which is an embedded technology in flow control products. For instance, Merit Capital owns Monarch Hydraulics. This news service recently reported that Precision Hydraulic Cylinders was in a sale process. Likewise Argosy and PNC Mezzanine own Energy Manufacturing, which has USD 50m in revenue and about USD 5m EBITDA.

The fourth banker said private equity groups like the business because it’s stable and valuations are reasonable. “If you gain a big customer, they’re sticky. It’s tough to get new customers, but hard to lose them.” Companies in the space seem to be doing well now, the banker added.

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