The filtration industry recorded 21 M&A transactions in 2004, up 300 percent from the seven deals posted in 2003 and a record number for the last decade, according to a new report by Robert W. Baird & Co.(Baird). Based on the aggregate annual transaction volume, 2004 has been the second-strongest year in the last ten with total dollar volume reaching more than $6.5 billion. This level is eclipsed only by the more than $9.0 billion recorded in 1999, which included the $7.7 billion sale of U.S. Filter to France’s Vivendi. GE’s announced $1.3 billion acquisition of publicly-traded Ionics in late November topped off an already blockbuster year in the water segment, which alone produced more than $5.0 billion in 2004.
According to the Baird report, this activity level is likely to continue in 2005, although perhaps at a smaller average deal size than the over $300 million average deal size registered in 2004. Consolidation activity has been driven by the filtration sector’s attractive worldwide growth characteristics, relatively high technical barriers to entry and increasing globalization through economies of scale.
“This is an industry in which it is often more cost-effective to buy rather than to build,” state the report’s co-authors, Stephen B. Guy, Director, Investment Banking and Steven M. Bernard, CFA and Director of M&A Market Analysis. “In particular, we think 2005 will be the year many significant private companies decide to seek liquidity. The robust 2004 filtration M&A markets, coupled with rebounding economic growth and pressure to have scale and global capabilities, will provide private companies with the catalyst to maximize value.”
The $50 billion Filtration Industry
A diverse mix of companies comprises the filtration sector, all essentially providing “mission critical” solutions integral to removing contaminants from air, gas or fluids. Applications include producing safe drinking water and clean indoor air; the discovery and production of pharmaceuticals; the protection of engines, fuel systems, and industrial equipment; and the recycling of waste water and industrial emissions. A key common denominator for filtration sector companies is the degree to which they participate in the market for replacement products and aftermarket services. It is this replacement business that generates a steady revenue stream for companies in the sector and contributes significantly to the sector’s attractiveness from an investment standpoint.
Using a group of publicly traded filtration company “pure plays” as a proxy, Baird notes the industry’s revenue and EBITDA in aggregate have grown at compound annual rates of 8.5 percent and 9.8 percent, respectively, since 1998, driven by worldwide population and industrial expansion, broader environmental regulations and enforcement, and growth in filtration applications.
Strategic Buyers Active, Valuations Consistent
Over the last ten years, Baird identified 108 reported M&A transactions (greater than $10 million in size) with an aggregate transaction value of $24.4 billion. Strategic acquirers dominated the market, accounting for more than 90 percent of all deals during the period. Median annual transaction valuations were relatively consistent and generally ranged from 8.0x to 10.0x EBITDA, although there was normal distribution and range of multiples over time with higher growth and larger platform targets generally garnering the highest multiples. Overall, the sector’s strong M&A valuations reflect that strategic acquirers typically bring consolidation synergies and generally have strong trading multiples themselves.
“While strategic buyers have accounted for the overwhelming majority of M&A activity over the last ten years, there were some noteworthy acquisitions made by financial sponsor firms in 2004, including Warburg Pincus’ $1.1 billion acquisition of Polypore and Clayton, Dubilier and Rice’s $610 million acquisition of Culligan,” stated Guy. “There is a substantial amount of money available from the private equity community, and strong interest in the filtration business model.”