catalyst corporate finance industrial electronics m&a report - sensors report

Sensors are now core componentsin almost all technology products.Their application is extremelybroad, with end markets rangingfrom automotive and aerospaceto industrial safety and consumerelectronics.

Whilst the general economicoutlook for 2012 is expected toremain challenging, we forecastdemand for sensors will growstrongly driven by the developmentof smaller, more reliable andincreasingly sophisticated sensorsand the need for safer, cleanerand more efficient applications.

The key observations fromour research:

In the last three years, internationalcorporates have used M&A to exit lessattractive businesses with highly cyclicalend markets and chosen to entermarkets with higher growth andmargins. We believe this process hasfurther to go.

The US and UK has led M&A in sensorand sensor systems accounting for over70% of all deals completed bycorporates or private equity investors.Building scale is seen as critical.

Trade acquirers have purchased UKbusinesses with complementary coresensor technologies (especiallytemperature, pressure, level and

flow - the most measured parameters)serving a range of end markets.The acquired businesses havegenerally had extensive overseasdistribution operations.

Major sensor manufacturers have usedM&A to evolve their offerings to addressend product markets which consumeeither higher volumes of sensors orhigher value components andsub-systems.

Larger trade players are aggressivelytargeting China. Whilst the typicalsensor content in a Chinese car istypically 50% less than North Americaand Western Europe, it is rapidlyexpanding and represents an excellentgrowth opportunity.

M&A activity willincrease as firms

drive for scale

Divestments in lowermargin cyclical markets

not yet complete

Corporatesaggressively targeting

sales in China

Industrial Electronics - SensorsM&A update

Winter 2011

Corporates look for global scale asapplication range for sensors widens

“There are few industrialsectors with so many serialacquirers - their strategies arewell defined and pipelines ofdeals are increasing”Mark Humphries, Partner

CatalystCorporateFinanceLLP2011

Industry TrendsThe UK remains one of the world’sleading producers of high performancesensors. The industry is concentratedon high-end production and designrather than high volume manufacturing.

There are around 23 major sensor typesused around the world. These areincorporated into a range of sub-systemsand instruments and applied in anincreasing number of end markets(see Figure 1).

Sales growth and profitability levels ofsensor companies tend to be higher whenthey have capacity to supply completesensor sub-systems. The markets forsensor sub-systems are typically seventimes the value of the sensor components.

There are also a number of other importantfactors contributing to success:

The industry is fragmented and madeup of many small companies focusedon niches. A key challenge for many UK

based companies has been in scalingoperations to address opportunitiesoutside their traditional end marketsand capitalising on the demand innew niches and geographies.

Research and development budgetsrun at typically 6% of sales. Withoutscale, it is often difficult for UKbusinesses to justify the investment inR&D and they risk not making the stepchanges in technology that are nowoften needed to compete. Companieswho can apply proprietary technology ina range of market niches can justify theinvestment more effectively.

Domestic sales often make up lessthan 20% of UK companies’ revenuesand exports are driven by sales to USand European clients and increasingdemand from Asia. Investments by UKsensor companies in the emergingeconomies have tended to initiallyinvolve establishing regional sales andsupport teams. Acquisitions are beingsought to establish local production tomatch local consumption.

Industrial Electronics - Sensors M&A update

Figure 1: Supply chain for sensors and instrumentation

The UK operatesglobally but remainsa largely fragmented

niche market

Source: Catalyst Corporate Finance, Knowledge Transfer Network

Components

SensorsPhysical

RadioactivityElectromagnetic radiation

PressureAuditory

ElectrostaticMagnetic

VibrationDeformation/Stress

PositionTemperature

ElectronicPhotonic

ChemicalBiological

Optics

Sub-systems

Wireless Networks

Autonomous Systems& Robotics

Vacuum

Cryogenics

Imaging

Displays

Distributed Computing

Power Systems

Instruments

Analytical

Scientific

Test & Measurement

Metrology

Process

Control

Global SensorMarket

>$50 billion

Value ofEnd Products>$1.500 billion

End markets

Defence/Security

Pharmaceuticals &Biotechnology

Aerospace

Space

Scientific (incResearch Facilities)

Oil & Gas

Healthcare

Mining

Life Science

Built Environment

Environmental

Automotive

Semiconductor

Arts & Heritage

Industrial

Food



Figure 2: Global Sensor Market

A characteristic of many successfulbusinesses in the sector is that they willsupply the same customers for manyyears. Building those relationships relies

on evolving designs alongside clientsneeds and delivering high levelsof reliability.

Source: BCC Research

Export led saleskey to growth

We expect imageand wireless sensors

to grow quickly

Key growth factorsThe rate of development of any specificsensor market is determined by a rangeof factors. The key issues influencingnew market strategies, R&D investmentbudgets and M&A strategies include:

The whole of the sensor market isgrowing steadily with image sensors,chemical / biosensors and positionsensors being the fastest growingniches (see Figure 2). In addition, aswireless adoption rates pick up andstandards harmonise, wireless sensorsare expected to become one of thefastest growing segments at an annualcompound growth rate of over 45%.

The increased use of smart phones andtablets has resulted in a rapid expansionin image sensors. This market is

expected to grow to $27 billion by 2016($18 billion in 2011). A good exampleof this is US based Omnivision, a majorproducer of high precisionsemiconductor image sensors(shipping 680 million CMOS imagesensors last year).

Unlike the developed world, wheremany sensor markets are now mature,the emerging markets (especially China)are experiencing much greater demandfor sensors within consumer productsand vehicles. Consumption will continueto grow as the middle class in theseeconomies expands.

UK manufacturers have an impressivetrack record in developing so-calledenabling technologies, which help tomaintain performance advantages.As chip level integration and wireless

Image, flow and level sensors

Pressure and temperature sensors

Biosensor and chemical sensors

Position and load/torque sensors Miscellaneous sensors


30,000

25,000

20,000

15,000

10,000

5,000

0

$M

illio

ns

2009 2010 2011 2016


Figure 3: Sensor & Instrumentation compositevaluation index

UK manufacturers havean impressive record

in developing enablingtechnologies

Source: Capital IQCatalyst Index: Cooper Industries, Danaher, Halma, Jenoptik, Measurement Specialties, Meggitt, Omnivision, Roper, Sensata, Spectris

connectivity advances, Britishbusinesses will need to exploit theirexpertise in MEMS / NEMS, photonics,radar and RF as well as systemsintegration and informatics.

In higher volume end markets such asautomotive, where lowest unit cost isthe differentiator, there is huge pressureto relocate manufacturing out ofdeveloped nations. For example,

companies like Sensata, which supplyhigh volumes of sensors into consumerproducts, have relocated over 90% oftheir manufacturing to low costcountries (Mexico, China and LatinAmerica) over the last 10 years.

Current ValuationsThe sensor and instrumentationmarket is often closely aligned withthe wider industrials sector. Over thepast year though, our compositehas out-performed the wider marketas a whole (Figure 3).


“UK businesses are attractiveacquisition targets for US andEuropean acquirers in this sector”Paul Vanstone, Director

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

FTSE 100 Catalyst Sensor and Instrumentation Index

Trade Buyer ActivityThe sensor and wider instrumentationmarket has experienced relativelyactive levels of M&A in recent years.In addition to the many mid-markettransactions, there have been a numberof industry changing deals.

For example, in 2006 Texas Instruments (TI)disposed of its Sensors & Controls business(renamed Sensata Technologies) to BainCapital, the global private equity firm, for$3.0 billion. TI sold the business in order tofocus on high-growth core digital signalprocessing and analog semiconductormarkets. Since then Sensata has spent over£470 million on four acquisitions in the USand Europe, acquiring two Honeywellautomotive divisions which were deemedto be too cyclical by Honeywell.

Leading UK companies Spectris and Halmahave also been particularly active in 2011,completing four deals each. Spectris’sacquisition of Omega Engineering in theUS for £291 million follows its strategy toacquire stand-alone businesses with similarcharacteristics to its own.

Catalyst’s observations on current corporateactivity are as follows:

Large industrial groups continue tospin off lower margin businesses.This was demonstrated byPerkinElmer’s recent disposal of itsdetection and illumination business tothe Veritas Group.

Many buyers are focusing on themature markets of the US, UK andWestern Europe to source acquisitions,to secure advanced technology andestablished customer relationships.

Whilst the more active acquirers haveclear strategies to acquire in BRICcountries, they have failed to achievethis for a number of reasons and optedfor alternative entry / marketdevelopment strategies. We expectthese companies to become moresuccessful in these countries asexperience builds.

Recent trade deals have beencompleted at a range of valuationlevels, however some buyers have paidup to 8x the current run rate EBITDA.


Figure 4: Comparison of average EV/EBITDA multiples

Acquirers paying8x EBITDA

for acquisitions

BRIC acquisitionstrategies have largely

failed to materialiseto date

Source: Catalyst Corporate Finance


Revenue(£m)

EBITDAMargin %

Latest Net Debt 2011

(£m)

Net debt change

during 24months

Average EV/EBITDA

FY 2010EV/EBITDA

Oct 2011

% ChangeEV/EBITDA(2010-2011)

Cooper Industries 3,239 16.8 252 -58.7 10.6 9.8 -7.5

Danaher 8,442 20.5 762 -46.5 11.7 12.6 7.6

Halma 518 22.3 37 -27.5 12.0 11.2 -6.6

Jenoptik 419 13.1 69 -58.6 16.5 5.6 -66.3

Measurement Specialties 130 18.2 31 -30.4 21.5 8.7 -59.5

Meggitt 1,162 24.9 730 -33.4 10.4 11.9 14.4

Omnivision 611 16.6 -270 78.4 16.7 2.8 -83.2

Roper 1,525 28.0 684.6 -1.7 12.6 11.5 -8.8

Sensata 984 28.3 894 -42.8 13.3 14.5 8.6

Spectris 901 18.9 87 -45.7 10.7 7.6 -29.3

Average 1,793 20.7 328 -26.6 13.6 9.6 -23.1

Average


Date Bidder Target Target Product lineDeal Value (£’m)

Sept-11 SensorTechnics (Ger)First SensorTechnology (Ger)

Manufacturer of pressure sensors for theauto industry 58.0

Aug -11 Sensata (US) Sensor-NITE (Bel) andManufacturer of measuringtemperature sensor equipment 199.0

Aug -11 Spectris (UK) Omega Engineering (US) Manufacturer of temperature andmeasuring equipment 290.0

Aug -11 Battery Ventures (US) )Gas MeasurementInstruments (UK

Manufacturer of advanced gas detectionsystems n/d

Jul -11 Maxim Integrated Products (US) Sensor Dynamics (Aust) sensors

Design and manufacture proprietary 100.0

Jul -11 M-Cap Finance (Fra) Gossen (Ger) Manufacturing of measurement and control products for industry n/d

Jun -11 Trescal (Fra) Antech Engineering (UK) Calibration of pressure, temperature andflow sensors n/d

Apr -11 )WIKA Alexander Wiegand(Ger DH Bunenberg (UK) Manufacturer of pressure calibration

equipment n/d

Mar-11 Halma (UK) Medicel (Swi) Manufacturer and supplier of health anddiagnostic equipment and sensors 66.0

Jan-11 Parcom Capital (Neth) Hobre Instruments (Neth) Provider of analysing and measuringequipment for the Oil and Gas industry n/d

Dec-10 Veritas Capital (US) Detection and Illuminationbusiness of PerkinElmer(US)

Manufacturer of lighting sensors 318.0

Nov-10 Halma (UK) Alicat Scientific (US) Manufacturer of wireless sensors for measurement 25.2

Oct -10 Astrium (Ger) Jena-Optronik (Ger) Electronic instruments for the aerospace industry n/d

Oct -10 Sensata (US) business)

Automotive on Board Sensors of Honeywell (US

Linear position and wheel speed sensors 88.0

Oct -10 Spectris (UK) N-Tron (US) Manufacturer of data acquisitionequipment for mission critical MIS 32.0

Oct -10 Measurement Specialties(US) Pressure Systems (US) Manufacturer of precision level and

pressure instrumentation sensors 16.0

Oct -10 3i Group (UK) Trescal (Fra) Manufacturer of calibration andmeasurement service solutions 94.0

Sept -10 Mine Safety Appliances(US) General Monitors (US) Manufacturer of high tech gas monitoring

and flame detection instruments 182.0

Aug -10 TransDigm Group (US) Semco Instruments (US) Provider and manufacturer of highly engineered sensors 46.0

Jun -10 Chequers Capital (Fra) Thermocoax (Fra) Manufacturer and provider of heating andtemperature measurement 37.0

Figure 5: Recent Sensors and Instrumentation M&A

Source: Catalyst Corporate Finance


Private EquityInternational Private Equity (PE)investors have been relatively active inthe sensors market in recent years,completing a fifth of all transactionssince January 2010.

Battery Ventures, a multi-stageinvestment firm focused on technologyand innovation, acquired UK basedGas Measurement Instruments inAugust and Detcon (US) in September.Together the companies create acomprehensive portfolio of fixed andportable gas detection products withglobal reach.

3i plc completed the secondarybuy-out of Trescal, the former AirLiquide sensor and measurementbusiness, for £94 million. In the lastyear 3i has backed three acquisitionsfor the company resulting in Trescalincreasing its turnover by over £30

million in 2011. Bain-backedSensata has also followed a buyand build strategy.

Private Equity investors in the UKhave however been relatively quiet inthis sector. Some of the characteristicsof typical sensor businesses have notbeen compatible with PE investmentcriteria. However, the opportunity toexecute a buy and build strategy insuch a fragmented market with thebenefit of high barriers to entry, areexpected to attract some sectorspecialists.

Prospects for M&AIn 2010 transaction values and dealvolumes increased and this trend hascontinued into 2011. Industryvaluations have recovered to 2007levels (8x EBITDA in some cases) andwith a number of serial acquirersactive, we expect further consolidationin the mid-market.

Recently the industry has been focused oninvesting in niche high margin businesseswith international scale as well as divestingnon-core high volume businessesgenerating low margins.

Whilst drivers for growth do remain, inthe short-term the macro environmentis presenting challenges. For example,the recovery in the automotive sector isapplying pressure on the sensorindustry to lower its unit cost anddevelop products that combine lowpower consumption with highperformance.

Market leaders have committed to anongoing acquisition strategy targetedat bringing technology and productioncapability in-house. Streamliningoperations, reducing costs and theability to shorten the productdevelopment cycle are all high onthe agenda.

Recent economic uncertainties haveseen sensor and instrumentationcompanies focus on markets that theyunderstand, maintaining sales channelsthat fit with established strengths.However the drive towards scale anddeveloping an international footprint willencourage the industry trend ofseeking out complementarytechnologies. This is borne out by M&Afigures suggesting that the majority ofdeals have been under £100 million.


Private equitycontinues to beimportant forglobal M&A

Buy and buildopportunities expected

to appeal toPE investors

Companies seekingcomplementarytechnologies areexpected to drivecontinued mid-

market M&ACatalystCorporateFinanceLLP2011

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