M&A trends in the manufacturing and industrials sectors: green manufacturing, investment in technology and industrial real estate

By Harry Beardall, Will Simpson
Dealmakers & Investors Energy Environment, Social, Governance Mergers & Acquisitions Property & Development Renewable Energy Risk & Compliance

Companies keep meeting new challenges via M&A 6 min read

Following our recent Insight on the key M&A trends in the food and beverages sector, we turn to the manufacturing and industrials sectors, with an analysis of some of the major M&A trends we are seeing and their likely direction.

Key takeaways

  • As the global transition towards decarbonisation gathers momentum, heavy emitters are looking to M&A to accelerate their transition to a greener future—whether through a diversification of historical business models dependent on fossil fuels, the acquisition of 'green' or 'clean' businesses, or embracing the circular economy (where products and materials are remanufactured and reused).
  • Investment in technology will continue to be key for manufacturers in Australia looking to outperform national and international competition. However, when considering the acquisition of technology assets or technology-forward target companies, buyers are increasingly seeking alternative 'try before you buy' arrangements. These include minority investments and joint venture partnerships, often with an option to purchase the asset or target company outright.
  • As industrial real estate M&A in Australia continues to attract high valuations, parties are increasingly looking at carving out warehousing—and, to a lesser extent, manufacturing—sites from industrial businesses, and looking to realise the value of those sites separately.

Recent M&A activity

Similar to other sectors, the past two years have been busy for M&A in manufacturing and industrials, as a result of low funding costs, an increased demand for dealmaking after the pandemic and a strong economic recovery. In 2021, Australian manufacturing attracted $117 billion from international investors.

However, manufacturing and industrials organisations in Australia are currently facing increasing challenges. These include rising energy costs, growing ESG demands, labour and material shortages, and the continued presence of international competition. As organisations seek different ways to maintain a competitive edge, we expect management teams to continue to look to M&A as a solution.

In the past 12 months, Allens has advised on some of the most significant M&A deals in the manufacturing and industrials sectors, including Seven Group Holdings' off-market takeover offer for Boral Limited, Viva Energy's acquisition of plastics manufacturer LyondellBasell Australia, and CEFC's Series A investment in Hysata, the advanced electrolyser technology developer and manufacturer, and an important player in Australia's emerging green hydrogen industry.

Who in your organisation needs to know about this?

Board of directors; legal counsel; strategic management.

Key trend 1: Decarbonisation

The industrial, mining and manufacturing sectors account directly for around one third of Australia's emissions. Confronted with growing stakeholder and regulator demands to reduce emissions, imminent legislation requiring a reduction in emissions, rising energy prices and requirements to demonstrate decarbonisation credentials to customers as part of sustainable supply chain practices, manufacturing and industrials organisations have little choice but to lower emissions to remain competitive.

So, how are companies in the manufacturing and industrials sectors looking to lower their carbon footprint via M&A?

healthcare-icons_new-classification.pngDiversification of historical business models dependent on fossil fuels.

Businesses that have historically been dependent on fossil fuels, such as oil refineries and participants in the coal supply chain, are looking to M&A to diversify their operations and generate 'cleaner' sources of revenue.

In the broader industrials sector, we have seen this recently with Aurizon's acquisition of One Rail, which was driven by Aurizon's desire to increase its exposure to non-coal, 'bulk' freight, focusing on the haulage of commodities such as copper, manganese and rare earths. As part of that transaction, Aurizon has undertaken to the ACCC that it will divest or demerge One Rail's East Coast Rail business, which focuses on hauling coal in New South Wales and Queensland.

healthcare-icons_new-classification.pngInvestment in 'green' or 'clean' businesses or technologies.

Manufacturing processes typically require considerable energy input—eg to generate high temperatures or to power heavy machinery. Historically, that requirement for high energy has led to high emissions. Refining—or, in some instances, reinventing—the manufacturing process to reduce emissions is a key focus for the sector. This will often require considerable capital, leading to increased investment opportunities for both national and international investors.

We expect this investment to focus primarily on:

  • emissions abatement technologies—eg the Low Emissions Intensity Lime and Cement technology developed by ASX-listed Calix, as recently deployed in a carbon abatement project with Boral; and
  • the development of 'green' process technology—eg the development and manufacture of green hydrogen electrolysers by Hysata.

A number of Australian manufacturers have announced an intention to invest capital in this space. For example, in September 2021, BlueScope announced an initial allocation of $150 million in capital, to be spent on new climate-related technology within the next five years. As part of that program, BlueScope has since signed memoranda of understanding with Rio Tinto and Shell to explore low-carbon steelmaking pathways, including the design and manufacture of a renewable hydrogen electrolyser.

healthcare-icons_new-classification.pngEmbracing the 'circular economy'.

The manufacturing and industrials sectors have an important role to play in the transition from a linear, or 'take-make-waste', system to a circular economy. Leading proponents in Australia include Visy, which remanufactures sustainable packaging products made from recycled content, and Brambles, whose pallet business is based on a circular 'share and reuse' model.

The desire to be part of this circular economy is a factor driving M&A in Australia, eg Viva Energy's acquisition of plastics manufacturer LyondellBasell Australia, which, through its polypropylene manufacturing plant in Geelong, has the potential to play an important role in the recycling of plastic in Australia. As more sustainable technologies are developed, we are seeing the capacity for circular economies to grow new sectors, including the conversion of solid wastes to hydrogen. This not only helps manufacturers improve their sustainability credentials, but also helps develop new revenue sources.

See here for more information on the energy transition and how we can help you with your transition needs.

Key trend 2: Investment in technology

Successful manufacturing businesses in Australia are increasing their investment in technology—undergoing digital transformation processes to obtain efficiencies and gain a competitive edge.

As the race intensifies to develop or acquire new technologies across the sector, we expect a considerable amount of M&A activity to be driven by a desire to acquire improved technological capability. This will focus, in particular, on digital connectivity and advanced data analytics, use of AI and machine learning, automation of processes and the use of 'dark factories', and the growing emergence of additive manufacturing. Similarly, financial and strategic buyers of legacy manufacturing businesses are likely to embrace technology as a way to uplift and bring value to newly acquired assets.

In an effort to encourage greater innovation and investment in technology, the Federal Government's proposal for a $15 billion National Reconstruction Fund includes an investment of $1 billion in critical technologies such as quantum computing, artificial intelligence, robotics and software development, and an additional $1 billion allocated for advanced manufacturing.

While we expect investors to continue to be attracted to manufacturers that have embraced technological advancements, manufacturers will need to remain disciplined when considering the acquisition of new technology assets. Buyers, when looking at transactions that are driven by the acquisition of new technologies, have started to consider alternative 'try before you buy' arrangements, including minority investments, joint venture arrangements, distribution agreements, or service and supply arrangements—often with an option to purchase the asset or target company if investment appears warranted. In the correct circumstances, these arrangements enable buyers to determine the fit of the technology with their existing systems, and to 'front load' any integration, compatibility or IP protection concerns.

Key trend 3: Industrial real estate M&A

Industrial real estate M&A in Australia continues to attract high valuations. In 2021, Allens advised on a number of the leading industrial real estate M&A deals, including advising ESR on the acquisition of Blackstone's Milestone Portfolio for $3.8 billion, and advising the LOGOS consortium on its $1.67 billion acquisition of the warehousing and property components of Qube's Moorebank Logistics Park.

Against this backdrop of favourable valuations for industrial properties, warehousing—and, to a lesser extent, manufacturing—sites are increasingly being carved out of industrial and manufacturing businesses, and sold separately (either on a straight sale or a sale-and-leaseback basis). We expect this trend to continue as parties seek to structure transactions in a way that maximises value.

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