From time to time I will write on the blog some
random thoughts of mine regarding the companies I aim to cover. These posts
will be basically me thinking out loud and writing something on the blog as the
rubbish Amsterdam weather keeps me inside. This is the first such piece. These
are just my initial thoughts on this subject so could be very wrong!
In 2005 Aalberts Industries (AALB) took over the
heat treating company Accurate Brazing Corporation (which had revenues of
around USD 5m). The company had 2 service centres in Goffstown (New Hampshire) and
in Greenville (South Carolina). The Industrial Services (IS) division of AALB
already had a small presence in US heat and surface treatment with Ionic
Technologies, also based in Greenville. Accurate Brazing has since opened a
location in Manchester (Conneticut).
AALB stated at the time in its press release
(14/07/05):
“The acquisition of
Accurate Brazing ties in with the strategy of Aalberts Industries to gradually
extend its network of service centres for heat and surface treatments, most of
which is centred in Europe, to the US by means of strategic takeovers of small and
medium-sized specialist firms offering high-grade heat treatment technologies.”
Since then the only other acquisition for IS in
the US was of the German/US company IDE which was not active in heat treating.
The following graph was included by AALB in the most recent investor
presentation for H1 2012, I have just added an annotation to it for extra emphasis
that it probably didn’t need.
From the graph it is clear that US exposure for
the division still remains minimal with revenues of roughly EUR10m in H1 2012. The
CEO of Bodycote, the world’s largest commercial heat treating company,
estimates that the total worldwide captive and commercial heat treatment
industry is approximately USD 35bn with USD 20bn of this coming from the US.
Thus the US would appear to be a logical geographical region for AALB to expand in this
area.
So, given that, I am conducting a brief
analysis into potential North American takeover targets. I am going to
rely heavily on “The Monty Heat Treat News”, an excellent resource for heat
treating news. They have compiled a list of their estimates of the largest commercial
heat treaters in North America which I will use. You can see their list here: http://www.themonty.com/top10largest.htm
The Monty’s estimates were made for the year
2011, I have tried to update the information where I can. I hope to get time to
do a more in-depth analysis into the American market this year. The following
are my initial thoughts. What’s clear is that 2012 was a busy year for the American
heat treating industry. Bodycote has taken out 2 (or one and a half) of the top
5 in the past year, although the Bodycote CEO has indicated that the company will be
growing organically mostly rather than through acquisitions for now. This could
provide a window of opportunity for AALB.
Number 1: Bodycote
This would definitely not be a bolt-on acquisition
so is ruled out!
Number 2: Bluewater
Thermal Solutions
This is an interesting one. In 2011, Bluewater
had 17 locations in the US and Canada. It is also based in Greenville where
Accurate Brazing Corp and Iconic Technologies have a presence. Bodycote
estimated it to be the world’s 5th largest independent thermal processor
with an about 2% market share during their 2011 Capital Markets Day.
In October 2012, Bodycote took over the
business of Carolina Commerical Heat Treating (CCHT) from Bluewater. This acquisition
comprised 7 of the 17 facilities owned by Bluewater. The cash consideration was
USD 68m. In the 12 months to September 2012 this acquired business delivered
USD 11.7m EBITDA on USD 34.9m sales. This
gives us precedent transaction multiples for heat treating acquisitions in
North America. So historical EV/Sales is approximately 1.95x and historical
EV/EBITDA is 5.81x.
In the same month, the private investment firm,
Aterian Investment Partners completed a carve-out acquisition of Bluewater’s remaining
heat treating facilities. Soon after in December, Bluewater completed the
acquisition of Southwest Heat Treat and Texas Energy Labs, which provides heat
treating and laboratory analytical services. This brings the number of heat
treating facilities now owned by Bluewater to 11. I would expect more bolt-on
transactions from this company over the next few years.
A very rough calculation of 20% of the USD 20bn
heat treating market being outsourced to independents and then Bluewater having
2% market share would imply sales of USD 80m. Taking out the roughly USD 35m of
sales from the CCHT transaction, this leaves a company with USD 45m of sales (assuming negligible contribution from the Southwest plant). Using
the average precedent transaction multiple (of the CCHT and Metal Improvement
Co. transactions – see no. 5) would mean a transaction size of USD 77m. In 2011,
AALB spent EUR 123m through 3 acquisitions for its IS division meaning that an
acquisition of Bluewater´s remaining operations could be within the company´s
range.
Aterian will probably want to exit their investment
at some point in the future and an acquisition of this size would make AALB’s North
American heat treating activities approximately a third as large as its
European operations (assuming these account for roughly 3% global market share).
Technology transfer could be possible from Europe to North America and vice-versa, potentially creating additional opportunities to add value. However this would
be a transformational transaction for the heat treating activities of AALB rather
than a bolt-on so would seem unlikely.
Number 3: Paulo
Products
A family owned company with 5 locations in Cleveland
(Ohio), Kansas City (Missouri), Murfreeboro (Tennessee), Nashville (Tennessee),
St. Louis (Missouri). Aalberts currently does not have heat treating facilities
in these states. Paulo Products’ headquarters are in St Louis. A look at their
website news appears to show GM and Toyota Boshuku (member of the Toyota Group)
as customers. A potential acquisition could bring more focus on the automotive
market in AALB’s North American operations (Accurate Brazing Corp. focuses on
the aircraft, ground turbine and power generation markets) as well as add a
valuable set of locations to help AALB become a true regional player in North
America.
Number 4: Al-Fe Heat
Treating
Specialised player in aluminium treating, its
website claims it is “America’s Largest Commercial Aluminium Heat Treater.” It
has 6 locations in Charlotte (North Carolina), Wadsworth (Ohio), Wabash
(Indiana), Columbia City (Indiana), Defiance (Ohio) and Saginaw (Michigan). Its
headquarters are in Indiana. The company serves aerospace, automotive, military
and commercial customers. Al-Fe recently completed a USD 20m capital investment
to retool its plant in Defiance, Ohio. An acquisition of Al-Fe could help AALB
expand as a niche player across geographies in the US.
Number 5: Metal
Improvement Company (heat treatment business of Curtiss –Wright Corp)
Too late as it was taken over by Bodycote in April
2012 for USD 52m. The company had 9 locations in North America and sales of USD
36.5m in 2011. Sales in 2011 were approximately USD 35m, EBIT was approximately
USD 7.7m. Historical transaction multiples
were therefore approximately EV/Sales 1.49x and EV/EBIT 6.75x. Taking an
average of the EV/Sales multiples for the CCHT and Metal Improvement Company transactions gives an EV/Sales transaction multiple of 1.72x for the sector.
Others:
No 6: Atmosphere Annealing is part of Brazilian
steel conglomerate Gerdau. It has 4 heat treating locations in North America.
No 7: Woodworth Heat Treating based in Michigan.
5 US locations (including affiliate RMT Woodworth) with an additional location
in Michigan as well as one in Mexico becoming operational in 2013, bringing the
total number of locations to 7. Mainly serves the automotive market. I am not
sure if AALB would try to develop a presence in Mexico before gaining more
traction in North America. Woodworth has a partial list of current customers
here: http://www.woodworthheattreat.com/company_history.aspx
No 8: Solar Atmoshperes. Heat treating is the primary
business with sales of approximately USD 25m. The company states on its website
that it has 3 plants and serves over 18 industries. The plants are in Pennsylvania
(2) and California. The other 2 divisions build vacuum furnaces and, among
other things, power supplies for vacuum furnaces. From what I can see AALB has not expressed an
interest in building vacuum furnaces but with other branches of its business it
has wanted to provide complete package solutions to customers. However would
this extend to servicing the captive market as well as conducting commercial
heat treating operations? Using the average EV/Sales transaction multiple for
the Solar Atmospheres heat treating business would give a transaction size of
USD 43m.
Conclusion
I think I should have conducted this exercise a
year or two ago as Bodycote has been very active in this space in 2012. I have
only briefly mentioned 8 companies with heat treating operations in the US,
there are many more smaller ones. With its strong cash generation, AALB could easily
target one of the smaller companies. I would think that if this was the case it
would be to acquire a specific technology that it does not currently possess. I
hypothesise then that 2 processes would occur. First, the acquired technology
could be shared with AALB’s European subsidiaries to enhance the service offerings
in Europe. Secondly the US subsidiary could be used as a platform for more
bolt-on acquisitions as well as AALB providing the capital investment and technical
know-how to broaden the service offering of the new US subsidiary.
I look forward to looking into this topic in
more depth later in the year.
Hello
ReplyDeleteAny kind of information Commercial Heat Treating process is very important for me. So Can you shares company list name about Commercial Heat Treating Company bases on any kind of work. And any video link about Heat treating process please shares.
The info. above is very useful and give us fine ideas about the Commercial Heat Treating Company. This is very perfect way to get the ideas about the Commercial Heat Treating Company.
ReplyDeleteThe idea above is a nice idea related to Commercial Heat Treating Company. This technology helps in making us aware about heat treatments.
ReplyDelete