Speculative Piece: Potential US heat treatment acquisition targets for Aalberts Industries

From time to time I will write on the blog some random thoughts of mine regarding the companies I aim to cover. These posts will be basically me thinking out loud and writing something on the blog as the rubbish Amsterdam weather keeps me inside. This is the first such piece. These are just my initial thoughts on this subject so could be very wrong!

In 2005 Aalberts Industries (AALB) took over the heat treating company Accurate Brazing Corporation (which had revenues of around USD 5m). The company had 2 service centres in Goffstown (New Hampshire) and in Greenville (South Carolina). The Industrial Services (IS) division of AALB already had a small presence in US heat and surface treatment with Ionic Technologies, also based in Greenville. Accurate Brazing has since opened a location in Manchester (Conneticut).

AALB stated at the time in its press release (14/07/05):

“The acquisition of Accurate Brazing ties in with the strategy of Aalberts Industries to gradually extend its network of service centres for heat and surface treatments, most of which is centred in Europe, to the US by means of strategic takeovers of small and medium-sized specialist firms offering high-grade heat treatment technologies.”

Since then the only other acquisition for IS in the US was of the German/US company IDE which was not active in heat treating. The following graph was included by AALB in the most recent investor presentation for H1 2012, I have just added an annotation to it for extra emphasis that it probably didn’t need.

From the graph it is clear that US exposure for the division still remains minimal with revenues of roughly EUR10m in H1 2012. The CEO of Bodycote, the world’s largest commercial heat treating company, estimates that the total worldwide captive and commercial heat treatment industry is approximately USD 35bn with USD 20bn of this coming from the US. Thus the US would appear to be a logical geographical region for AALB to expand in this area.

So, given that, I am conducting a brief analysis into potential North American takeover targets. I am going to rely heavily on “The Monty Heat Treat News”, an excellent resource for heat treating news. They have compiled a list of their estimates of the largest commercial heat treaters in North America which I will use. You can see their list here: http://www.themonty.com/top10largest.htm

The Monty’s estimates were made for the year 2011, I have tried to update the information where I can. I hope to get time to do a more in-depth analysis into the American market this year. The following are my initial thoughts. What’s clear is that 2012 was a busy year for the American heat treating industry. Bodycote has taken out 2 (or one and a half) of the top 5 in the past year, although the Bodycote CEO has indicated that the company will be growing organically mostly rather than through acquisitions for now. This could provide a window of opportunity for AALB.

Number 1: Bodycote

This would definitely not be a bolt-on acquisition so is ruled out!

Number 2: Bluewater Thermal Solutions

This is an interesting one. In 2011, Bluewater had 17 locations in the US and Canada. It is also based in Greenville where Accurate Brazing Corp and Iconic Technologies have a presence. Bodycote estimated it to be the world’s 5^th largest independent thermal processor with an about 2% market share during their 2011 Capital Markets Day.

In October 2012, Bodycote took over the business of Carolina Commerical Heat Treating (CCHT) from Bluewater. This acquisition comprised 7 of the 17 facilities owned by Bluewater. The cash consideration was USD 68m. In the 12 months to September 2012 this acquired business delivered USD 11.7m EBITDA on USD 34.9m sales. This gives us precedent transaction multiples for heat treating acquisitions in North America. So historical EV/Sales is approximately 1.95x and historical EV/EBITDA is 5.81x.

In the same month, the private investment firm, Aterian Investment Partners completed a carve-out acquisition of Bluewater’s remaining heat treating facilities. Soon after in December, Bluewater completed the acquisition of Southwest Heat Treat and Texas Energy Labs, which provides heat treating and laboratory analytical services. This brings the number of heat treating facilities now owned by Bluewater to 11. I would expect more bolt-on transactions from this company over the next few years.

A very rough calculation of 20% of the USD 20bn heat treating market being outsourced to independents and then Bluewater having 2% market share would imply sales of USD 80m. Taking out the roughly USD 35m of sales from the CCHT transaction, this leaves a company with USD 45m of sales (assuming negligible contribution from the Southwest plant). Using the average precedent transaction multiple (of the CCHT and Metal Improvement Co. transactions – see no. 5) would mean a transaction size of USD 77m. In 2011, AALB spent EUR 123m through 3 acquisitions for its IS division meaning that an acquisition of Bluewater´s remaining operations could be within the company´s range.

Aterian will probably want to exit their investment at some point in the future and an acquisition of this size would make AALB’s North American heat treating activities approximately a third as large as its European operations (assuming these account for roughly 3% global market share). Technology transfer could be possible from Europe to North America and vice-versa, potentially creating additional opportunities to add value. However this would be a transformational transaction for the heat treating activities of AALB rather than a bolt-on so would seem unlikely.

Number 3: Paulo Products

A family owned company with 5 locations in Cleveland (Ohio), Kansas City (Missouri), Murfreeboro (Tennessee), Nashville (Tennessee), St. Louis (Missouri). Aalberts currently does not have heat treating facilities in these states. Paulo Products’ headquarters are in St Louis. A look at their website news appears to show GM and Toyota Boshuku (member of the Toyota Group) as customers. A potential acquisition could bring more focus on the automotive market in AALB’s North American operations (Accurate Brazing Corp. focuses on the aircraft, ground turbine and power generation markets) as well as add a valuable set of locations to help AALB become a true regional player in North America.

Number 4: Al-Fe Heat Treating

Specialised player in aluminium treating, its website claims it is “America’s Largest Commercial Aluminium Heat Treater.” It has 6 locations in Charlotte (North Carolina), Wadsworth (Ohio), Wabash (Indiana), Columbia City (Indiana), Defiance (Ohio) and Saginaw (Michigan). Its headquarters are in Indiana. The company serves aerospace, automotive, military and commercial customers. Al-Fe recently completed a USD 20m capital investment to retool its plant in Defiance, Ohio. An acquisition of Al-Fe could help AALB expand as a niche player across geographies in the US.

Number 5: Metal Improvement Company (heat treatment business of Curtiss –Wright Corp)

Too late as it was taken over by Bodycote in April 2012 for USD 52m. The company had 9 locations in North America and sales of USD 36.5m in 2011. Sales in 2011 were approximately USD 35m, EBIT was approximately USD 7.7m. Historical transaction multiples were therefore approximately EV/Sales 1.49x and EV/EBIT 6.75x. Taking an average of the EV/Sales multiples for the CCHT and Metal Improvement Company transactions gives an EV/Sales transaction multiple of 1.72x for the sector.

Others:

No 6: Atmosphere Annealing is part of Brazilian steel conglomerate Gerdau. It has 4 heat treating locations in North America.

No 7: Woodworth Heat Treating based in Michigan. 5 US locations (including affiliate RMT Woodworth) with an additional location in Michigan as well as one in Mexico becoming operational in 2013, bringing the total number of locations to 7. Mainly serves the automotive market. I am not sure if AALB would try to develop a presence in Mexico before gaining more traction in North America. Woodworth has a partial list of current customers here: http://www.woodworthheattreat.com/company_history.aspx

No 8: Solar Atmoshperes. Heat treating is the primary business with sales of approximately USD 25m. The company states on its website that it has 3 plants and serves over 18 industries. The plants are in Pennsylvania (2) and California. The other 2 divisions build vacuum furnaces and, among other things, power supplies for vacuum furnaces.  From what I can see AALB has not expressed an interest in building vacuum furnaces but with other branches of its business it has wanted to provide complete package solutions to customers. However would this extend to servicing the captive market as well as conducting commercial heat treating operations? Using the average EV/Sales transaction multiple for the Solar Atmospheres heat treating business would give a transaction size of USD 43m.

Conclusion

I think I should have conducted this exercise a year or two ago as Bodycote has been very active in this space in 2012. I have only briefly mentioned 8 companies with heat treating operations in the US, there are many more smaller ones. With its strong cash generation, AALB could easily target one of the smaller companies. I would think that if this was the case it would be to acquire a specific technology that it does not currently possess. I hypothesise then that 2 processes would occur. First, the acquired technology could be shared with AALB’s European subsidiaries to enhance the service offerings in Europe. Secondly the US subsidiary could be used as a platform for more bolt-on acquisitions as well as AALB providing the capital investment and technical know-how to broaden the service offering of the new US subsidiary.

I look forward to looking into this topic in more depth later in the year.