Coming to America
In recent work we have looked at the M&A landscape for industrials and concluded that we expect to see a sharp increase in the number of deals and an increase in the values paid. This week we saw Hertz agree to buy Dollar Thrifty at 18x current earnings, which to us look like they are approaching a cyclical high, and 37x what might be more mid cycle earnings based on historic average returns on capital. To be fair, DTG is a company with little representative history and returns on capital have been improving recently. The transportation sector has a history of effective indifference to acquisitions – i.e. on average the acquirer performs in line with its peer group post closing and announcement. The exception is the rail group where acquirers have done well. Auto rental is a consolidating business, and the sector responded well to the Hertz announcement. However, it would be wrong to expect the same from this space as for rails as the barriers to entry in car rental are much lower.
Perhaps the more interesting deal, announced today, is Daikin’s acquisition of Goodman Global, from the private equity consortium that bought the business in 2007. Without the financials for Goodman it is hard to judge the exact multiple, but it looks like Daikin is paying more than $1.0bn in premium over what was paid for the business in 2007.
This is essentially a 100% domestic business and so Daikin is buying US exposure with this deal.
With Asia and Latin America slowing rapidly, and Europe very weak, the US (to use a worn out expression) is currently “the most attractive horse in the glue factory”. Demand growth expectations in the US are now better than they are in many regions.
The desire to add US exposure adds further fuel to the US M&A fire, particularly if you have a strong currency – like Japan. We may see more bidders for US assets than simply other US companies and this could increase not only the number of deals, but also the prices paid. As we have mentioned in our research, you want to own the target; focus on companies that have management teams open to all strategic possibilities and focus on companies with a business bias towards the US. Today, the perceived values of sales and assets in Asia and Europe are lower than they have been in decades.