DACH manufacturing slump puts strain on deal-doing

Data from the German Statistics Bureau and IHS Markit's Purchasing Manager's Index (PMI) shows Germany's manufacturing sector is contracting faster and more aggressively than in any other European country. Confidence among German manufacturers has become statistically negative and employment in the sector saw a net marginal fall in April, according to IHS Markit.

Austria's PMI has also declined, falling to its lowest level in April since 2015. The sector is now considered to be contracting. Business confidence among Swiss manufacturers has dropped by 23% since 2018.

Private equity activity in the DACH region has also been affected. In the industrial and consumer manufacturing sectors, there were 14 buyouts from January to April 2019, against 20 buyouts during the same period last year, according to Unquote Data. At the time of publication, there were four buyouts in May 2019, against 11 in May 2018.

Ulrich Müller, a managing director at corporate finance firm Alantra, suggests that the founder or private shareholder of a well-performing company under no pressure to sell might stall their divestment plans due to the weaker trading and uncertain outlook. This leads to a drop in the availability of interesting targets.

A slowdown in the automotive industry has perhaps put the most pressure on the sector, with many firms reporting a decrease in new orders. "The automobile and auto supply industries are significantly impacted by the shift to e-mobility and the diesel crisis, and this effectively means a large part of the German manufacturing industry having to redefine itself," says Markus Paul, M&A and corporate partner at Freshfields Bruckhaus Deringer.

The automotive industry accounts for approximately 20% of German industrial revenue, with far-reaching effects for the industrial manufacturing sector – a downturn in the automobile market can send a shockwave throughout the entire domestic economy. A large proportion (78%) of cars manufactured in Germany are exported, so the industry benefits from a healthy global economy and free trade. Brexit, possible tariffs on German imports to the US, slowing global growth and trade tensions between the US and China all weaken the industry.

Müller says consumer confidence globally has suffered due to these trends: "Q1 sales of automobiles in China were down by 20%. In Italy and Spain sales were down 7-8%, which is probably because of more local political uncertainty. This has a severe effect on German automotive OEMs and their suppliers." For example, ThyssenKrupp, which is partly owned by GIC and BlackRock, recently posted a net loss that the company attributed to a slowdown in the automotive sector. One of Germany's largest listed manufacturers, ThyssenKrupp supplies components to the auto industry.

Silver linings
Franz Woelfler, a managing director at Aurelius, raises another challenge for the sector: "There is uncertainty around whether Germany has invested enough in its digital and telecoms infrastructure." However, Woelfler believes the uncertainty offers an opportunity for his firm. "Classic old-school German manufacturing businesses are less attractive for regular GPs," he says. "Having said that, given Aurelius's approach, we still see the sector as attractive because the ongoing substantial change creates situations where value can be unlocked through operational support."

Alantra managing director Christoph Handrup agrees that the sector still offers opportunities. "There are sub-sectors that are still favoured by private equity. Companies in industrial automation and Industry 4.0 are still very sought after, so it's not the same picture across the entire sector," he says.

Manufacturing has been a stalwart for private equity in the DACH region for decades. Post-2008, manufacturing deals have made up 43% of all buyouts, according to Unquote Data. Deals in 2019 include Deutsche Private Equity's acquisition of Massenberg, the purchase of IFCO by Triton and Adia, and Advent International's buyout of Evonik's methacrylates business.

Investment from such firms may demonstrate confidence in manufacturing companies. Freshfields' Paul says: "Sponsors are still looking, and will continue to look, at individual companies that have strong market positions in niche areas, but no one is betting on an upward macro trend in manufacturing at the moment."

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• Topics
• Industrials
• DACH
• Investments
• Germany
• Switzerland
• Austria
• Freshfields Bruckhaus Deringer
• Alantra
• Aurelius Equity Opportunities