Oerlikon targets surface solutions M&A with CHF 2.5bn firepower, CEO says

29 May 2019 - 03:46 pm UTC

by Ketaki Gokhale, with analytics by William Cain

Swiss industrial conglomerate OC Oerlikon Corporation is looking to acquire companies that engineer and treat surfaces, and can spend up to CHF 2.5bn on a single acquisition, CEO Roland Fischer has told this news service.

 

The Pfaeffikon, Switzerland-based company is exploring deals that would bolster its core surface solutions business, which manufactures protective coatings for components and precision tools.

 

Possible targets could include companies specialized in die casting, polishing, honing or surface grinding, as well as companies with a strong customer base in North America, which would complement Oerlikon’s business in Europe and Asia, Fischer said.

 

The company would use cash and debt to fund acquisitions. Oerlikon would be willing to take on net debt of 1.5x-2.5x EBITDA, allowing it to invest between CHF 2.0bn-CHF 2.5bn in acquisitions, Fischer said.

 

Oerlikon closed FY18 with annual EBITDA of CHF 406m and net cash of CHF 398m. Oerlikon secured a net cash injection (post-special dividend) of CHF 379m from the disposal of its Drive Systems business to Dana Incorporated, which closed in 1Q19.

 

Assuming total net cash of CHF 777m and an acquisition at 10x EBITDA, with targeted group leverage of 2.5x, Oerlikon would be able to muster acquisition firepower of CHF 2.4bn pre-synergies, according to Dealreporter analytics.

 

Given its available resources, "we have to do something," Fischer said. "Our shareholders are patient and are giving us time," he added. Though he conceded price expectations for companies are quite high, he noted that Oerlikon is looking for multiples at a level that can be justified.

 

 

Looking stateside

 

Bluechip companies worth CHF 5bn would be "out of range", but a CHF 2.5bn deal is something Oerlikon "can do easily", Fischer said.

 

A potential large target that could be of interest to Oerlikon is the surface solutions arm of a US-based company that provides services to the aviation industry, Fischer said, declining to elaborate further. It is unclear at this stage whether the unit will be put up for sale, he said.

 

US-based PPG last week decided against separating its industrial coatings business from its architectural paints business after completing two reviews of the business upon the urging of activist investors.  

 

So far, Oerlikon has used a “string of pearls” strategy of small acquisitions to hone its focus on the surface solutions business, while selling non-core assets. In 2018, it closed six acquisitions, including purchases of Eicker and Sucotec

 

Oerlikon has an internal team of 10 people that scouts M&A opportunities and Fischer himself spends a significant amount of time evaluating potential deals.

 

Many of Oerlikon’s potential targets are parts of bigger companies, with little reported data, making the scouting process challenging, Fischer said.

 

"Buying companies is sometimes the right solution. Sometimes it helps us close gaps in the portfolio landscape. Sometimes there are just very good opportunities,” he added.

 

Group sales rose 3.3% to CHF 624m in the quarter ended 31 March. The company reported it was affected by uncertainty in the global economy and trade outlook, which resulted in lower automotive demand and production volumes in China, a key market for the company. The Asia-Pacific region contributed 45% of company sales last quarter, and Europe was its second largest market, contributing 35% of sales, the report added.

 

While the automotive sector has lagged, demand from the aviation sector was strong last quarter, and demand from the semiconductor industry could be a driver of growth for Oerlikon in the mid- to long-term, Fischer said.

 

Future growth for the company will come from an increasing number of components needing coating, customer demand for new coating technologies, as well as its expansion into new geographies and customers in previously untapped areas ranging from medical devices to the Swiss watch industry.