Some subsectors of industrial services have experienced depressed valuations as they struggle with cyclicality, inflation and supply chain shortages, sources tell Mergers & Acquisitions.

Residential construction and automotive manufacturing have shown weakness, says Eric Andreozzi, head of industrial services at Deloitte Corporate Finance LLC. “Subsectors at the start of a difficult cycle are having more struggle in the market,” he says. “Private equity investors don’t want to get caught buying companies at or near the top of a cycle, so they take a ‘wait-and-see’ attitude,” causing backlogs and slowing sale pipelines.”

Industrial dealflow is down “slightly” from the past few years, Andreozzi says. Some subsectors like logistics and packaging remain strong. “But bankers are holding off on taking clients to market given the quite recent downturn in investor sentiment, so we suspect that there will be a lull until more certainty presents itself on the direction of the economy,” he adds.

“Disruptions to the supply chain have impaired manufacturing deals this year”, says Helana Robbins Huddleston, partner at CohnReznick Advisory. “Two years ago, Covid-19 caused disruption to the supply chain of cars and the semiconductors that go into them. Demand for electronics and chips that power them continued to persist, but fabrication closures, shortages in labor, and logistic problems created backlogs. We couldn’t get computer chips from China. Car buyers have to find used cars. It’s about supply and demand.”

When discussing the current manufacturing and distribution M&A market, Huddleston noted, “Deals this year may not be as high quality as last year given the activity of last year and investment bankers getting the opportunity to select higher valued deals to bring to market. This is creating a wider gap between the seller and buyer on deal valuations and causing deal negotiations to take longer to close.”

Weaker subsectors of industrials pulled down average Ebitda multiples a couple of turns, Andreozzi adds. “Multiples across building products, manufacturing and automotive are constantly in flux due to today’s unsteady market.”

Buyers in the industrials sector are more cautious than they have been in the prior two years, as they analyze the historical impact of the pandemic, effects of inflation, a looming recession and other macroeconomic threats, says Andreozzi.

Acquirers in the first half of the year were nearly as active as 2021, but in the last few months, the accumulation of macroeconomic threats have made investors wary, says Andreozzi. “We expect more of what has been happening these latest few months to continue through 2022,” he mentions. “There are numerous and competing economic indicators hitting our news feeds, and those can be somewhat paralyzing to the markets, which crave certainty in any direction.”

-Sarah Cohen