A prospective private equity-led bidding war for Toshiba Corp. is welcome news for an industrials M&A landscape that’s been limited by the pandemic. And the conglomerate target of that interest, with business lines spanning semiconductors to sewage, could bode well for middle-market M&A across multiple industrial subsectors.
CVC Capital Partners expressed takeover interest in Toshiba earlier in April but has reportedly delayed submitting a formal proposal after the company appointed a new CEO effective April 14. Former CEO Nobuaki Kurumatani has been replaced by chairman Satoshi Tsunakawa. The takeover approach appears to have flushed out interest from KKR and Brookfield Asset Management, which are also reportedly preparing offers.
News of a bidding war might well take M&A watchers by surprise. Buyer interest isn’t exactly frothy. While industrial deal volume in Q4 rose 24 percent over Q3 to 773 transactions, the annual figures indicate that the growth comes from a weak base: the year’s 2,538 deals mark the lowest level since 2017, and is 18 percent lower than 2019 deal volume, according to Deloitte.
And with the vast majority of those 2020 deals clocking in at an undisclosed value or under $100 million, the sound of multiple pencils working their way toward a $21 billion-plus takeover will be music to the ears of funds eager to dispose of portfolio companies or deploy dry powder.
KKR’s potential pursuit of Toshiba makes an examination of the company’s segments even more timely given its target to raise $100 billion by 2022. Should the financial sponsor fail to ink a deal with the conglomerate, middle market companies with comparable operations could well be consolation prizes.
Enter Toshiba. Looking at the company’s segments, there’s lots of room for extrapolations to the broader industrials M&A market.
Exclude a likely conglomerate discount, and dealmakers could see hopes for loftier valuation multiples for middle-market comps to Toshiba’s Building Solutions segment. The unit makes parts for elevators and HVAC systems among others, and constitutes 15 percent of the firm’s net sales. When arrayed against other buyouts of elevator makers, like Advent and Cinven’s $18.7 billion acquisition of ThyssenKrupp’s elevator unit in 2020, a Toshiba transaction could create another lofty comparable for smaller U.S. building solutions players.
Toshiba’s Infrastructure Systems, which makes products for sewage treatment, railway, and fingerprint authentication for railway travel among many others, constitutes 20 percent of net sales as of the latest full year report, FY2019.
Toshiba’s constituent parts also include Electronic Devices & Solutions, which makes semiconductors, HDDs, memory products (20 percent of net sales), Digital Solutions (7 percent), which makes Internet of Things products, and Energy Systems (15 percent), which provides nuclear, thermal, hydro power solutions.
A potential LBO could entice many U.S. sellers off the sidelines, especially given Toshiba’s year-over-year group-level decline in net sales since FY18. Now may be the time to refresh pitchbooks with a fresh valuation comp if indications of interest progress to a full bidding war. First stop, CVC?