• Deal value for 2023 down almost 15% from 2022
• Increases for aerospace, metal and steel
• Third largest number of deals since 2010

Financial markets around the world had another tough-and-go year in 2023 and the North American industrials and chemicals sector was no exception. Continued high interest rates and inflation contributed to this, but a second half surge bodes well for 2024.

The value of disclosed deals in 2H23 was USD 65.2bn, up more than 30% from 2H22 when total deal value in industrials and chemicals was USD 49.4bn, according to Mergermarket data.

Overall industrial and chemical deal value in 2023 was down close to 15% from the previous year, falling to USD 116.8bn in 2023 from USD 136.9bn in 2022. However, the number of deals, 1,772 transactions announced, was the third highest since 2010.

Sectors such as aerospace and metal/steel saw increases in deal value, bucking the trend.

These sectors made up some of the larger transactions announced last year. These include Nippon Steel‘s [TYO:5401] USD 14.9bn bid for United States Steel [NYSE:X], Apollo‘s [NYSE:APO] USD 8.1bn take-private of Univar Solutions and BAE Systems’ [LON:BA] USD 5.6bn pending acquisition of Ball Corporation‘s [NYSE:BALL] aerospace business.

AEROSPACE & DEFENSE FLYING HIGH

The aerospace and defense sector saw USD 15.7bn in deal value on 86 deals announced in 2023 and represented some of the largest deals in industrials and chemicals overall. In addition to BAE Systems’ pending acquisition of Ball Corporation’s aerospace business, other big deals in the sector included Apollo’s acquisition of Arconic for USD 5.2bn, Heico’s [NYSE:HEI] buy of Wencor Group for USD 2.05bn and Safran’s [EPA:SAF] pending purchase of Collins Aerospace’s actuation and flight control business from RTX Corporation [NYSE:RTX] for USD 1.8bn.

The backlog of new commercial aircraft globally now surpasses pre-Covid levels and continues to grow, providing nearly a decade of production visibility, says Jon Nemo, managing partner at AE Industrial Partners (AEI).

Meanwhile, original equipment manufacturer giants such as Boeing [NYSE:BA], Airbus [EPA:AIR], and General Electric [NYSE:GE] are “focused on stabilizing their supply chains to support this substantial production ramp,” which will likely result in further strategic consolidation, says Nemo.

On the defense side, two sector advisers say heightened geopolitical turmoil will boost demand for missiles and hypersonic weapons.

L3Harris Technologies’ [NYSE:LHX] acquisition of propulsion systems maker Aerojet Rocketdyne for USD 4.7bn completed in July and NewMarket Corporation’s [NYSE:NEU] proposed purchase of AMPAC, a maker of specialty chemicals for rocket motors, for USD 700m in December are evidence of this, they say. Another company in the market is United Launch Alliance, a space-launch joint venture between Lockheed Martin [NYSE:LMT] and Boeing, as reported.

SPACE ACTIVITY CONTINUES ORBIT

Space technology is among the hot subsectors within Industrials as contracts come up for grabs. Some smaller private companies could become attractive targets for larger defense players looking to gain a competitive edge via access to contracts, say the two sector advisers.

Besides propulsion systems manufacturers, businesses providing critical space capabilities such as space launch, small satellites, and components will be logical targets for both strategic and private-equity acquirers, adds Nemo.

Roughly 8,000 satellites are orbiting the earth today, and that number will reach 100,000 within the next decade, says Alec Dafferner, partner and head of US advisory for GP Bullhound. Once SpaceX’s Starship is operational, it will be a game-changer for the sector, he says.

“There’s going to be a massive need for solutions,” Dafferner says. Companies like LeoLabs that help manage and track objects, trash, and clutter in low Earth orbit could become in vogue given the number of launches.

In addition to AEI, Blackstone [NYSE:BX], Advent International, TJC, KKR [NYSE:KKR], and Veritas Capital have been actively investing in the space sector, a trend that Nemo and Dafferner see continuing. A&D players such as GE Aerospace and General Dynamics [NYSE:GD] may also look more actively at space opportunities, Nemo adds.

Companies that went public via SPAC deals a few years ago but are now struggling could also be targets, notes Kirk Konert, managing partner of AEI.

“I think there will be consolidation and opportunities for investors to find good companies at better prices than ever in the space sector,” Konert says.

EVs ANOTHER M&A DRIVER 

The need to develop and commercialize public electric vehicle charging infrastructure will also drive M&A and investment activity. “Battery development will drive activity in mining as automotive producers and battery suppliers look to secure the basic mineral and metal components needed to produce batteries for EV cars and electrical storage facilities at scale and in (battery) machinery manufacturing,” says David Brinton, partner at Clifford Chance.

But he cautions that the geopolitical climate could weigh on activity. “Political and economic stability is a linchpin of M&A activity and as cross border M&A activity in the industrials sector continues to grow, instability, even on a fairly limited regional basis, can have an outsized impact.”