Spokane Journal of Business

Inland Northwest M&A activity is likely to increase

Agriculture, health care sectors expected to see uptick in transactions

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As the country continues to emerge from the Great Recession of 2008 to 2010, we're seeing a promising resurgence in the merger-and-acquisition market in the United States.

The gradual improvement in the economy, together with increased stock prices and large cash positions, has led companies to consider acquisition as a means to grow topline revenue and squeeze out higher profit margins. In the past two years, we have seen buyers make acquisitions to create scale, vertically integrate, or access products or services their customers are demanding. Indeed, in 2011, just a year after the country first emerged from the recession, M&A volume in the U.S. was $1.25 trillion on 11,517 transactions.

However, real or perceived market risks have prevented M&A from accelerating. While many expected 2012 to be a robust year for M&A, the deal markets actually contracted slightly due to economic uncertainty (real or perceived) around the domestic economy, Greece, and the fragility of the banking systems, as well as political risks including the Presidential election, gridlock in the U.S., and the possible breakup of the European Union.

As these political and economic uncertainties recede, there is a growing perception in the market today that the economy, while choppy, is on an upward trend.

Despite initial struggles, the fourth quarter of 2012 saw strong momentum, and the year closed out at $1.21 trillion on 10,882 transactions—levels close to those of 2011.

Many analysts and experts, including Pricewaterhouse Cooper, are forecasting robust deal-making activity in 2013, and now that the year is well under way, we are starting to see this come to fruition as the economy continues to recover and market certainty increases.

What does this mean for Spokane in particular and Eastern Washington in general? At Cascadia Capital, we believe that the number and dollar volume of Eastern Washington transactions in 2013 and 2014 will exceed the number and volume of deals in 2011 and 2012.

There were a total of 57 transactions in Spokane and 83 transactions in the whole of Eastern Washington in the 2011-2012 time period for a total deal volume of $3.7 billion. The aggregate deal volume was misleading as one transaction—the sale of New Albertsons—accounted for $3.3 billion of the total.

However, we believe the number of transactions and average deal size will increase dramatically in the 2013-2014 time period as a result of improved deal markets nationally, as well as a number of factors unique to Spokane and the Eastern Washington market at large.

As M&A deal volume continues to pick up across the U.S. and in global markets, this rising tide will lift all boats; however, regional and industry-specific factors still play a significant role in any one company's ability to secure a successful transaction. Industry sectors that are growing rapidly—like information technology, e-commerce, and oil and gas—will typically see a high level of M&A activity. Conversely, an industry that is experiencing a slowdown in growth often will see a pickup in M&A as companies seek increased scale and operational leverage to squeeze out a higher operating margin.

Eastern Washington is home to several industries with deep roots in the region, including agriculture companies and their suppliers, as well as health care. For these sectors in particular, there are many signs that indicate a groundswell of M&A activity.

For the region's cluster of health care companies, President Obama's Affordable Care Act is likely to be a driving force behind deal activity. As the health care industry as a whole works to adapt to the new regulations, we expect to see transactions designed to improve operational efficiencies and maintain or grow profit margins.

Agriculture, one of the mainstays of the Eastern Washington economy, also is expected to be a growth sector in the next few years. The primary reason is the growing world population (expected to reach 8.2 billion people by 2025) and its increasing affluence.

With more income comes a desire for and ability to procure higher quality food and other staples that we have long taken for granted in the West. As worldwide demand for specialty and luxury food items continues to grow, so too will the agriculture companies supplying it.

A secondary reason is the continued use of some agriculture products in the manufacturing of ethanol and biofuels. With the U.S. and other leading countries supporting the development of alternative fuel sources, cash crops, including corn, which form the basis of many of the sources that will continue to be in high demand. As global demand for agriculture products continues to grow, agricultural land will remain in favor as an asset class.

Growth in the agriculture sector also is having the effect of generating opportunities in ancillary industries, notably supplier and service companies that serve the agricultural ecosystem.

As a result, companies that store produce, transport produce, and manufacture equipment for the industry also are experiencing strong growth.

In fact, the agricultural products sector in Eastern Washington was estimated at $8.5 billion in 2011 by the USDA and the agricultural services sector is estimated at an additional $3.7 billion.

As a result, Cascadia expects to see strong M&A opportunities for players across the full spectrum of agricultural land, production, and suppliers and service providers.

Three primary market forces are driving this consolidation in the agricultural sector:

Overseas and domestic buyers see U.S. agricultural production land as an asset that will be driven by secular demographic trends.

In addition, overseas buyers want a physical presence in the U.S. market and the know-how of U.S. producers that already understand U.S. and global industry dynamics and have the expertise to maximize land value and crop production.

The agricultural sector will see increased industry verticalization as large companies seek to own the supply chain to wring out maximum profitability. This would be a marked shift in approach but we have seen the shift occur in other industries and believe it will occur in the agricultural sector.

Private equity-backed companies that supply goods and services to the agricultural sector are looking to grow via acquisition. Many of these companies don't have a presence in Eastern Washington and will look to acquire a presence rather than build it.

Finally, Spokane has a strong cluster of traditional, middle market industry sectors such as manufacturing, transportation, and consumer products sectors.

We are aware of a couple of companies located in Spokane currently going through a sale process and should they sell, the price could well be in excess of $100 million.

We believe this is just the beginning of a two-year-plus run on deal activity in the region. For businesses with strong market positions, experienced management, and a track record of growth, deal-making opportunities should abound.

  • Michael Butler

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