Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

They don't call it the harvest month for nothing.

U.S. makers of planes, trains and factory-floor machinery have reaped some $42 billion worth of deals so far this September, making it the biggest month for industrial transactions since November 2009, according to data compiled by Bloomberg. A good chunk of this month's total is attributable to Northrop Grumman Corp.'s $9.2 billion purchase of missile maker Orbital ATK Inc. (announced on Monday) and the $30 billion acquisition of avionics company Rockwell Collins Inc. that United Technologies Corp. hammered out over Labor Day weekend.

Spike!
September has been the biggest month for deals involving U.S. industrial acquirers and targets since 2009. And there are still a few weeks to go.
Source: Bloomberg

The strong month is enough to put 2017 in the upper echelon for U.S. industrial M&A, with the pace of activity about on par with what we saw at this point a year ago.  So now the question is, where will activity go from here? Odds are we're not going to break annual records. But the deals we saw in September could foreshadow more consolidation to come, particularly in aerospace and defense. 

Upper Middle Class
It's been a big year for industrial deals, but not that big
Source: Bloomberg

What's interesting about this spate of activity is that it's happening at a time when valuations are soaring: the median Ebitda multiple paid in deals involving U.S. industrial acquirers or targets so far this year is 17, the highest since at least 2000. That's hard to stomach for acquirers who have vocalized a disciplined acquisition strategy to their shareholders. But in the face of still-recovering organic sales growth and pressure to cut costs while also investing in innovation, companies can make a case for taking the leap on a bigger deal.

Case in point being United Technologies. CEO Greg Hayes said in May that it's tough to do a big deal "with valuations where they are today". Fast forward to September and he's paying 14 times 2018 Ebitda for a Rockwell Collins deal that promises a rate of return lower than what the company has said it would seek. That's because it's "one of those properties that you rarely get a chance to acquire," CFO Akhil Johri said at a Morgan Stanley conference last week.

Going, Going, Gone
Deals among industrial companies are getting more expensive, on average
Source: Bloomberg
Note: Data for all years except 2017 is for the full year.

There are a few deals on the horizon that may add to 2017's total. Dover Corp. this month said it would explore options for the bulk of its energy business. But the real action could come in 2018 as industry heavyweights Honeywell International Inc. and General Electric Co. carry out the results of the portfolio reviews they're both currently undertaking.

GE Healthcare is often pointed to as a spinoff candidate, but I'm skeptical new CEO John Flannery will part with a business so tied to its digital push. JPMorgan Chase & Co. analyst Steve Tusa says splitting off transportation would make some sense if there was a need to raise cash, given the unit's shrinking strategic importance amid weakening demand for locomotives. It would likely have to sell rather than spin that out. Flannery will give his take on the state of GE's businesses in November . 

Big Hitter
Combining GE and Honeywell's aerospace units would create a behemoth with more than $40 billion in revenue. That would make it a worthy, if not bigger, rival to United Technologies post Rockwell Collins.
Source: Bloomberg
Note: Exact pro-forma sales are difficult to calculate and depend on the divestitures required by regulators.

Another option is for GE to look to combine its aviation business with Honeywell's aerospace division. Activist investor Dan Loeb is pushing Honeywell to separate out the business. We'll get an answer on whether it will follow that advice in October. Odds are Flannery might wait to make a move until that's already a stand-alone entity. He has enough to tidy up internally at GE, without adding a massive deal. But you never know.

Should Honeywell separate out its aerospace business (and perhaps spin out some assets from its performance-materials and technologies unit as well), Honeywell could then buy Rockwell Automation Inc. to further expand in software, sensors and monitoring equipment, suggests Stifel Financial Corp. analyst Rob McCarthy. Rockwell Automation is one of those companies that seems destined for a takeover amid the push toward data-driven efficiency, but its size ($22 billion) limits the pool of suitors. With new Honeywell CEO Darius Adamczyk's commitment to accelerate growth  and increase software sales, it would seem to be a logical (if expensive) fit.

The pieces are starting to move, but we may not know where they all land until next year.   

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It still trails the record volume seen in 2007 during the M&A boom and lags the momentum of 2015, a year that brought us Berkshire Hathaway Inc.'s $37 billion purchase of aerospace components maker Precision Castparts.

  2. This excludes deals smaller than $100 million to avoid outsize comparisons. 

  3. It arguably did have a chance late last year when Rockwell Collins was cheaper, but that's a different story. 

  4. Halliburton Co. is one potential buyer for a purchase that RBC analyst Deane Dray estimates may amount to $3.2 billion.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net