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INTERVIEW - David Schofield, Co-Founder and Managing Director, Future Materials Group

News International-French

3 Feb 2020

Based on the available transaction reporting for the first eleven months of 2019, JEC Composites Magazine asked David Schofield, co-founder and managing director of Future Materials Group, to analyse several significant merger and acquisition (M&A) transactions in the advanced composites sector, and to comment on some industry-wide patterns.

David Schofield, Co-Founder and Managing Director Future Materials Group
JEC Composites Magazine: What was the climate for M&A transactions in 2019?
David Schofield:
With global M&A transactions, in general, remaining strong and relatively stable over the last few years in spite of challenges on the horizon, some observers had suggested there may be a noticeable slowdown in M&A activity during 2019. The advanced composites industry previously demonstrated itself to be a remarkably robust industry segment in M&A terms, with opportunities presented by significant technology fragmentation and global distribution throughout the value chain attracting buyers and driving activity levels in 2017 and 2018 that matched or slightly exceeded the overall market.
Following an intense 2018, Q1-Q3 2019 did see the pace of overall M&A activity in North America and Europe slow down slightly (Reference1). As the year progressed, activity levels remained healthy if not spectacular, though it remains to be seen if this is due to the market impact of ongoing trade disputes and slowing economic growth or the reduced availability of quality targets. Corporates have maintained a high level of acquisition activity, with M&A their chosen route to add new technologies or scale up rapidly.

JEC Composites Magazine: Does the M&A activity cover the entire value chain or rather concern some specific segments?
David Schofield: Our research has shown that the centre of the composites value chain, typically manufacturers of composite intermediates and components, sees the highest levels of M&A activity.
As for previous years, 2019 again saw the majority of composites M&A transactions in this mid-ground position of the value chain, with around 65% of the 54 transaction targets reviewed being suppliers of intermediate products or composite components themselves.
With the extreme ends of the value chain – raw material suppliers and OEMs – tending to feature relatively low numbers of sizeable and often consolidated players with very high capital intensity, transactions at this level often require extremely large expenditure and have significant barriers to completion. In contrast, the more fragmented centre of the value chain contains thousands of smaller enterprises offering an easier market entry proposition and lower capital requirements. However, this is only part of the picture as the value chain mid-point also provides ample opportunities to rapidly add capabilities or differentiating technology.  
Examples such as Sekisui Chemical’s purchase of AIM Aerospace and Teijin’s acquisition of Benet Automotive see material specialists positioning themselves closer to end users by investing in component manufacturing capability.
Sekisui’s $510 million cash purchase of AIM Aerospace has provided the Japanese high-performance chemicals group (previously established mainly in electronics, automotive infrastructure and industrial markets) with an established position in the aerospace components supply chain manufacturing: primary and secondary aerostructures, engine components and interior systems.
Teijin’s M&A programme has been extremely active in recent years (Continental Structural Plastics acquired in 2017 and Inapal Plasticos SA in 2018) and 2019, again, saw them investing in component manufacture with the purchase of automotive composite and component supplier Benet Automotive. The Czech Republic-based Tier 1 Benet currently supplies OEMs such as Mercedes, BMW and the VW Group and will form a key part of Teijin’s multi-material strategy that targets an automotive composites business of $2 billion by 2030. (Reference2)

JEC Composites Magazine: What are the main motivations for M&A?
David Schofield: Another beneficial aspect of the incredibly diverse composite value chain is its potential to provide buyers with rapid innovative development that can complement their existing technology and competencies without being too far removed from their current core expertise. This pattern is something we have continued to see in 2019 as large material and intermediate manufacturers such as Hexcel, Kordsa Teijin and Aditya Birla all acquired SMEs with a particular technology niche.
Completing in the first few days of 2019, Hexcel’s $160 million acquisition of ARC Technologies saw the carbon fibre and composite materials manufacturer add a highly-specialized functionality to its existing composite portfolio. ARC Technologies engineer and manufacture a wide range of electromagnetic and radio frequency control products with a long history of supplying composite shielding parts and assemblies to leading US defence industry OEMs. The two companies will combine their research and technology teams and focus on combining absorptive metallic fillers with various thermoset and thermoplastic matrix systems for commercial and military aerospace and defence applications. (Reference3)
Kordsa, a subsidiary of Sabanci Holdings and a global player in reinforcement technology, has been building a position in advanced composite intermediates with acquisitions in fabric weaving and honeycomb manufacture, and added complementary technology with their $181 million investment in Axiom Materials. Axiom’s expertise in prepreg includes oxide-oxide ceramic matrix composite materials with global aerospace qualifications in high-temperature aircraft engine applications. (Reference4)
In a similar move, Teijin’s technology expansion strategy included the acquisition of US-based manufacturer of highly heat-resistant thermoset prepregs, Renegade Materials. Also used in extreme temperature applications such as aircraft engine parts, Renegade’s material technology extends the boundaries of Teijin’s portfolio range significantly with polyimide and bismaleimides (BMI) prepregs that can operate at service temperatures up to 1000˚C.  
Connora Technologies, a Californian developer and formulator of epoxy thermoset systems featuring a recyclable Recyclamine® hardener technology, had been a joint development partner of Aditya Birla Chemicals since 2016. In July 2019, Aditya Birla completed the full acquisition of Connora, reaffirming their strategy in advanced composite materials and their intention to bring the Recyclamine® technology to scale. With the potential to recover reinforcement fibres and textiles intact from epoxy thermoset composites via a low-energy acidic dissolution process that also outputs a reusable thermoset plastic compound, there is clearly much to be gained if the processes can be industrialised.

JEC Composites Magazine: What is your feeling for 2020?
David Schofield: Considering the year ahead, and what it will bring for M&A in the composites world, it would seem that the overall industry drivers for investment and acquisition are still positive. Strong growth rates and sustainable attractive margins for the manufacturing business are likely to maintain the appeal of composites for both private equity and strategic trade buyers. In addition, the diversity and fragmentation, both technology-wise and regionally, of the composites value chain continue to offer excellent opportunities to initiate, build or extend a technology position in composites. Though opportunities are present, the high level of opaqueness caused by this fragmentation means that a strong industry insight and market experience will continue to be required to uncover the best deals.  
With this in mind, we do still expect to see significant and continued activity in composites M&A throughout 2020. Historically, transactions can be more drawn out, as due diligence and decision-making processes may extend, if a downturn occurs. When we come to review the year’s activity, it will be interesting to observe any impact of such delays, perceived risk factors such as ongoing trade disputes, slowdowns in Far Eastern economies and uncertainty in the Eurozone, on both deal activity and transaction EV/EBITDA multiples.

References:
1 PitchBook quarterly M&A reporting
2 Teijin press release
3 Hexcel press release
4 Composites World news article