Flow Control Market Update – October 2024

Acquisitions Increase as Technology-Enabled Products, Value-Added Distributors Pique Buyer Interest

The Flow Control market has continued to see healthy merger and acquisitions (M&A) activity driven by favorable long-term trends including demand for integrated technology solutions, infrastructure spending, and heightened safety measures. Despite the volatile economic environment and a general lag in deal activity, Flow Control M&A activity has kept pace with 2023, which was second only to 2021 in terms of record deal volume. Private equity investors (who have driven 33.3% of deal activity to date in 2024) have been drawn to the long-term growth potential in areas such as Oil & Gas, Pharmaceuticals & Life Sciences, Water & Wastewater Treatment, and associated technologies and services from select providers. Notably, filtration and pipeline safety trends have reinforced the demand outlook for services and equipment, as companies grapple with heightened regulatory scrutiny and an increasing focus on environmental sustainability. The convergence of these factors has positioned the Flow Control market as a compelling target for both strategic and financial investors, and Capstone expects deal activity remain robust for the foreseeable future.

Investments Proliferate Flow Control Market, Enhancing Sector Players’ Capabilities

Technology-enabled products and value-added distributors (VADs) have provided players in the Flow Control market with an advanced, comprehensive range of services that enhance the value of U.S. infrastructure. The role of VADs extends beyond sitting as middlemen in the supply chain. They bring technical support, Maintenance, Repair, and Operations (MRO) services, engineering, inspection, commissioning, vendor managed inventory, and solution customization. These additional services contribute to more efficient and effective application of flow control technologies across a wide spectrum of original equipment manufacturers (OEMs). Public players in the Flow Control market have utilized automation and retrofit products to incorporate rising technologies. Of note, manufacturer of industrial flow management equipment, Flowserve (NYSE:FLS), notched robust bookings of $1.3 billion in Q2, a year-over-year (YOY) increase of 12% and a 20% increase quarter-over-quarter (QoQ), according to its Q2 earnings call.¹ Flowserve added RedRaven to its Flow Control segment in 2021 to support flow control equipment regardless of the manufacturer, allowing companies to quickly realize the full benefits of internet of things (IoT) integration and predictive analytics without major infrastructure changes. IoT-based predictive maintenance solutions are expected to reduce overall factory equipment maintenance costs by 5-10% and cut maintenance planning time by 20-50%, according to a Deloitte report.² “We’re betting big on IoT to help companies avoid costly downtime, which is not feasible in today’s world,” said Scott Rowe, Flowserve President and CEO, in the call. VADs often possess deep technical knowledge of the products they distribute, including various types of valves and flow control systems. With the rising adoption of digital technologies, VADs have increasingly offered solutions to integrate with digital platforms. This expertise has allowed them to provide valuable guidance to customers in selecting the right products for specific applications, thus ensuring optimal performance and compliance with industry standards. M&A have become an attractive opportunity to incorporate digital solutions and VADs into existing business operations.

Sustained Demand for Flow Control Products Spurs Buyer Acquisition Appetite

M&A volume in the Flow Control market has reached 36 deals announced or completed year-to-date (YTD, marking an increase of 2.9% YOY as the space demonstrates resilience amid a lag in broader M&A markets in 2024. Disclosed purchase multiples in the space from Q2 2021 through Q2 2024 averaged 2.3x EV/Revenue and 13.7x EV/EBITDA as companies with niche technological offerings and sustained product demand have garnered attractive valuations. Comparatively, middle market M&A deals in the broader Industrials industry have averaged 8.6x EV/EBITDA in the three-year period ending Q2 2024, as reported in Capstone’s Q2 2024 Capital Markets Update. This backdrop has aided the premium buyers have placed on the Flow Control market.

Flow control technology businesses and their channel partners create sticky customer relationships, recurring aftermarket opportunities, and high-margin, value-added products and services. With many of its end-market growth CAGRs above GDP growth, flow control represents a compelling acquisition thesis for private equity buyers.

Wolfgang ZahnerDirector, Capstone Partners

Strategic buyers have accounted for 69.4% of sector transactions through YTD, compared to 57.1% during the prior year period. Public strategics have experienced the greatest increase in transaction activity to-date, comprising 16 deals versus five deals in YTD 2023. Private equity activity has been subdued as buyers await a loosened credit environment. This has been demonstrated as private equity platform investments and add-ons both fell by two deals to-date. Sector fragmentation and niche market positioning by small- and medium-sized enterprises (SMEs) have drawn an active pool of both strategic and private equity buyers. There has been notable interest from private equity firms in the Flow Control space as an influx of buyers seek to diversify portfolio offerings under sponsor ownership. These firms typically invest in companies with strong growth potential, often providing the capital necessary for expansion and technological development. Of note, AEA Investors acquired Crane Engineering Sales, a distributor of fluid handling equipment, for an undisclosed sum (August 2023). The platform transaction was followed by an add-on acquisition of Geiger Pump & Equipment, an industrial and municipal pumps and process equipment manufacturer, in March 2024 (undisclosed). AEA has demonstrated a history of success with investments in the Flow Control sector after its first successful investment in Fluid Flow Products (acquired February 2015 and divested January 2019). Looking ahead, Capstone anticipates private equity firms to position themselves to benefit from infrastructure funding and effective water treatment solutions through M&A.

Filtration Technology and Pipeline Safety Impels Flow Control Market M&A

The Flow Control market, encompassing filtration, valves, technology, and systems for water and wastewater treatment, is critical for various end markets, including Oil & Gas, Chemical Processing, Water Management, and Agriculture. The recent influx of infrastructure funding has coincided with growing pressure from government regulations to enhance pipeline safety. The U.S. has prioritized modernizing aging pipelines to bolster corrosion control standards and improve pipeline safety and efficiency. In 2022, The U.S. Department of Transportation's (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) passed safety and environmental protection requirements on more than 300,000 miles of onshore gas transmission pipelines throughout the U.S., according to a PHMSA report.³ These new requirements are a part of a collection of laws known as the “Mega Rule” which was first initiated after the 2010 gas transmission pipeline incident in San Bruno, California, and resulted in the death of eight people and injuries to more than 60 others. "When pipelines leak or fail, the results can be deadly, as we saw in the 2010 San Bruno tragedy. This new rule will significantly improve safety and environmental protections for our nation’s natural gas pipeline system, which will help save lives, avoid costly disruptions to gas service, and strengthen our supply chains," said U.S. Transportation Secretary, Pete Buttigieg, in the report. The law, which took effect in 2023, has increased safety requirements for previously unregulated pipes in areas such as cathodic protection (CP) and isolation. With more than 190,000 miles of liquid petroleum and 2.4 million natural gas pipelines, new players have entered the Oil & Gas space of the Flow Control market seeking diversification, according to the American Petroleum Institute (API).⁴ Major beneficiaries include the Oil & Gas Pipeline and Production segments, which are expected to return high compound annual growth rates (CAGRs) at 4.6% and 4.4%, respectively from 2024-2029, providing attractive investment opportunities for acquirers, according to the Measurement, Control & Automation Association’s (MCAA).⁵

The Infrastructure Investment and Jobs Act has provided substantial funding to support the replacement and overhaul of aging piping systems across the U.S. With an allocation of more than $55 billion specifically for water infrastructure, cities and municipalities are now equipped to address long-standing issues related to deteriorating pipelines, lead service lines, and outdated sewer systems, according to The White House.⁶ Major cities have used these funds to replace corroded pipes and modernize their water distribution networks, improving both safety and efficiency. This federal support is not only ensuring the delivery of clean, safe drinking water but also enhancing the resilience of urban infrastructure against future challenges. Notably, since Capstone advised Garlock Pipeline Technologies in its acquisition by Branford Castle in February 2023 (terms confidential), the manufacturer of critical pipeline sealing and electrical isolation products has seen strong tailwinds from heightened government infrastructure investments. Companies demonstrating a commitment to the incorporation of monitoring technologies and servicing capabilities in response to stringent regulations are projected to command buyer interest in the Flow Control market. In an exclusive conversation with Capstone, GPT Industries’ President Darin Lane explained:

The introduction of PHMSA's Mega Rule, combined with large-scale water system overhauls in major cities like Houston and San Diego, is set to significantly increase acquisition interest in companies specializing in cathodic protection systems and advanced monitoring technologies. These regulatory and infrastructural shifts are driving demand for reliable and innovative solutions, making such companies attractive targets for consolidation in the market.

Darin LanePresident & CEO, GPT Industries

Targeted End Markets Reignite M&A in the Flow Control Market

Flow Control end markets such as Oil & Gas, Pharmaceuticals & Life Sciences, and Water & Wastewater Treatment have driven the design of end-use applications for flow control products in the sector due to increasing demand for advanced and efficient solutions. The Oil & Gas and Water & Wastewater Treatment segments have increasingly required precise and reliable flow management systems to optimize production, fueling buyer interest in acquiring innovative flow control technologies. Furthermore, technologies with an ability to remove contaminants and provide clean water efficiently have garnered significant buyer interest. Smaller, localized treatment systems have become more popular, particularly in remote or underdeveloped areas, providing an efficient alternative to large-scale central treatment facilities. Recent and notable transactions are highlighted below.

• OPW Fueling Components Acquires Marshall Excelsior (July, $395 Million, 3.3x EV/Revenue) — In July, Dover (NYSE:DOV)-backed OPW Fueling Components acquired Marshall Excelsior Company (MEC) for an enterprise value of $395 million, equivalent to 3.3x EV/Revenue. OPW is a leading provider of mission-critical cryogenic and flow control components and operates within Dover’s Clean Energy & Fueling segment (DCEF). MEC's portfolio of engineered products such as fittings, adapters, valves, regulators, pigtails, gauges, and related accessories help customers meet the exacting safety, quality, and reliability standards of its mission-critical applications. The business, which serves the Liquified Petroleum and Cryogenic markets, generated $120 million in revenue and added new transport vehicle remote monitoring and severe service valve offerings in 2023, according to a press release.⁷

"The acquisition of MEC enhances Dover's portfolio and continues the strategic evolution of DCEF into a growth-exposed set of critical components businesses catering to clean energy applications. In addition to strengthening our clean energy platform, MEC is a strong business model fit with Dover due to its significant recurring revenue of mission-critical components, differentiated product attributes with clear regulatory and safety-driven tailwinds, and large installed base with a diverse blue-chip customer base. We are excited about executing on our attractive value-creation plan with this acquisition," commented Dover’s President and CEO, Richard J. Tobin, in the press release.

• Tinicum Acquires KGM Gas (May, Undisclosed) — Private equity firm, Tinicum, acquired VAD measuring and flow-control equipment provider, KGM Gas, for an undisclosed sum (May). The transaction marks Compass Groups’ divestment of KGM after it acquired the company in December 2021 (undisclosed). KGM’s portfolio of products and offerings includes gas meters, instruments, regulators, valves, and value-added services such as technical support, training, testing and calibration, and product repair and refurbishment. “Our partnership with Tinicum will enable further investments in our team, product offering, capabilities and facilities in order to continue delivering superior solutions that enable growth and efficiency gains for our customers,” said Tim Wood, CEO of KGM, in a press release.⁸ With Tinicum’s support, KGM expects to expand its geographic footprint through both organic and inorganic growth, extend its line card, and invest in its sales team and distribution infrastructure.
• ABB Acquires Real Tech (January, Undisclosed) — Canadian-based electrification and automation leader, ABB (SWX:ABBN), acquired Real Tech for an undisclosed sum in January. Real Tech, a market leader in real-time water quality monitoring and testing products, has more than 10,000 installed solutions in Municipal Water, Wastewater, and other industries around the world, according to a deal press release.⁹ “ABB will accelerate the deployment of Real Tech's technologies through the vast ABB global sales and service network, making a step change in access to market. The acquisition is an important part of ABB Measurement & Analytics’ strategy, which includes adding advanced environmental technologies to the portfolio,” said Jacques Mulbert, Division President, ABB Measurement & Analytics, in the press release.

As the Flow Control market looks to the future, Capstone expects the sector’s growth prospects to remain strong, buoyed by long-term infrastructure investments like those driven by the IIJA. In the Oil & Gas space where process instrumentation and automation are forecasted to grow by a 4.6% CAGR, technologies and services from VADs have reflected continued demand. Increasingly stringent safety and environmental protection requirements from PHMSA’s “Mega Rule" have also accelerated adoption of advanced filtration and pipeline safety technologies. Across other key end markets like Water & Wastewater Treatment, the Flow Control sector has taken on a larger role in enabling critical infrastructure improvements, making it an attractive target for private equity and strategic investors alike. With M&A activity on track with the previous year's robust levels, the sector is positioned to capitalize on both near-term opportunities and long-term trends.

To discuss dynamic downstream applications, provide an update on your business, or learn about Capstone's wide range of advisory services and Flow Control market knowledge, please contact us.

Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.

Endnotes

1. Flowserve, “Q2 2024 Earnings Conference Call,” https://event.webcasts.com/viewer/event.jsp?ei=1648112&tp_key=1e70ee110b, accessed August 23, 2024.

2. Deloitte, “Predictive maintenance and the smart factory,” https://www2.deloitte.com/us/en/pages/operations/articles/predictive-maintenance-and-the-smart-factory.html, accessed August 23, 2024.

3. U.S. Department of Transportation, “New Rule Strengthens Safety Requirements for more than 300,000 miles of Natural Gas Pipelines,” https://www.phmsa.dot.gov/news/phmsa-final-rule-safety-gas-transmission-pipelines-repair-criteria-integrity-management-Improvements-cathodic-protection-management-of-change-and-other-related-amendments, accessed August 23, 2024.

4. American Petroleum Institute, “Where are the Pipelines?,” https://www.api.org/oil-and-natural-gas/wells-to-consumer/transporting-oil-natural-gas/pipeline/where-are-the-pipelines#0, accessed August 23, 2024.

5. Measurement, Control & Automation Association, “Industry Insights,” https://themcaa.org/, accessed August 23, 2024.

6. The White House, “Fact Sheet: The Bipartisan Infrastructure Deal,” https://www.whitehouse.gov/briefing-room/statements-releases/2021/11/06/fact-sheet-the-bipartisan-infrastructure-deal/, accessed August 23, 2024.

7. Dover, “Dover Acquires Marshall Excelsior, a Leading Provider of Mission-Critical Cryogenic and Flow Control Components,” https://investors.dovercorporation.com/news-releases/news-release-details/dover-acquires-marshall-excelsior-leading-provider-mission, accessed August 23, 2024.

8. Business Wire, “Tinicum Acquires KGM in Partnership with Management,” https://www.businesswire.com/news/home/20240524561306/en/, accessed August 23, 2024.

9. ABB, “ABB acquires innovative optical sensor company to expand smart water management offering,” https://new.abb.com/news/detail/111308/abb-acquires-innovative-optical-sensor-company-to-expand-smart-water-management-offering, accessed August 23, 2024.