By Troy Pawelko
Given the current economic environment, many businesses and governmental bodies are reducing their budgets and expenditures for flow control products. As a result, heightened focus is being paid to optimizing the efficiency of flow control equipment and squeezing the greatest utility out of existing assets.
The outlook for the Flow Control industry is generally favorable, though our view is tempered by the overall economic environment, which remains in recovery.
- Based on our research, growth in the Flow Control industry has historically been fairly closely correlated with overall economic growth in the world’s economies (Chart I). We believe this relationship will continue going forward.
- The Asia/Pacific region has grown substantially faster than other areas of the world in recent decades. We expect China, India and other Asia/Pacific countries to continue taking market share from the rest of the world and increase their demand for Flow Control products and services (Chart I).
- We see several interesting trends and developments that should bode well for certain participants in the Flow Control industry:
- We believe ultraviolet water and wastewater disinfection is almost a certainty in the United States and elsewhere, and that this form of treatment will most likely run in parallel with existing biocide processes, as each form of treatment offers benefits the other does not.
-In the near- to mid-term, we expect certain Flow Control companies to benefit from portions of the economic stimulus packages that have been implemented in the United States and elsewhere (e.g., the Clean Water State Revolving Fund and Drinking Water State Revolving Fund in the United States).
Continuing Consolidation
We are convinced that mergers and acquisitions (“M&A”) activity will continue in the three Flow Control categories we monitor and research – Industrial Valves, Pumps and Filters.
-The international scope and scale of business has increased dramatically over the past 25 years and will continue as customers increasingly demand global suppliers with local distribution and service, on-site and in-field maintenance and repair services, regional product support and local market knowledge and customer relationships.
-Industry leaders will continue to acquire smaller Flow Control companies to (i) realize cost savings; (ii) expand the target company’s sales base; and (iii) broaden their product offering(s) to increasingly offer “one-stop” solutions.
-As a result of some degree of consolidation having already occurred, a number of Flow Control companies are “lightly-owned” by private equity investment firms. It is our expectation that many of these Flow Control businesses will invariably be put up for sale once the economy improves so their private equity sponsors can make a profit on their investments.
-Long-term (“LT”) capital gains tax rates in the United States are practically guaranteed to increase from the Bush administration’s current 15% level, which expires on December 31, 2010.
Conclusions and Takeaways
So, in light of the above information (much of which we recognize is not new to you), on what should a Flow Control company focus in 2010? First, there should be no areas overlooked for cost cutting or other efficiency gains. This should be part of every company’s DNA, but it has become more important in today’s environment. Second, capitalize on economic stimulus packages and funds that are available. Finally, pay attention to the continuing consolidation that will continue in the industry. Once profits and predictability return so too will the M&A and financing markets.
About the Author: Troy Pawelko is Managing Director of FC Advisors, LLC. FC Advisors was founded to provide experienced, professional and sophisticated financial advisory services to corporate and private equity clients. The Flow Control industry is an area of focus and expertise for the firm. For more information, visit the company’s website at www.fcadvisorsllc.com.
