Southern U.S. deal activity to remain steady in 2H17 (Mergermarket)

Managing Directors Scott Winship and Cliff Atherton comment on M&A activity in the southern U.S. and the 2018 outlook for the consumer and energy sectors.

By Mark Druskoff, Deputy Editor of Energy at Mergermarket

A steady pace of M&A may continue across the Southern US, though dealmakers indicated positive fundamentals that should provide longer-term tailwinds to the region. Rick Lacher, managing director at Houlihan Lokey in Dallas, said he sees M&A activity in the South holding steady. Broad and positive indicators will aid in creating an environment conducive to M&A, including the continued decline in the unemployment rate, inflation held in check, and only modest increases in interest rates, he said. 

Over the longer term, the Southern US has advantages that should attract investment that could lead to M&A, said Scott Winship, managing director at investment bank GulfStar Group. Chief among them is a business-friendly regulatory environment and greater prevalence of right-to-work states than other areas of the US, he said, adding that such factors are important to manufacturing-focused enterprises. 

Winship is based in Texas, but runs a national consumer-focused practice and increasingly hears from private equity firms creating teams dedicated to the Southern US because of its advantages. 

Tony Balloon, partner at Alston & Bird in Atlanta, agreed that the Southern US has advantages for investment compared with other regions, and noted that such factors are also attractive to international investors. 

The Southeast US is a hub for auto manufacturing with BMW, Daimler, Porsche, Nissan and Kia all operating large facilities, Balloon noted. 

Investors from Mexico looking to establish closer ties with OEMs are examining investment in the Southern US, Balloon continued. Asian investors, particularly those from China, are also looking more closely at the region, he said, adding that such activity begins as greenfield investment or joint ventures, but has the potential to turn into M&A over the longer term. 

Energy services is another important sector across portions of the Southern US that could see an increase in activity, according to Cliff Atherton, managing director at GulfStar Group. Spending by upstream operators has improved significantly compared to 2016 and pricing for service providers is starting to recover, he said. 

The brighter outlook has some energy services business owners considering whether now is a good time to exit, Atherton noted. 

The Southern US is also seeing positive growth in the construction, building products and infrastructure; healthcare; and consumer sectors, Houlihan Lokey's Lacher noted. A growing population relative to other parts of the US aids the region, he noted. 

Another potential catalyst to deal activity across the Southern US moving forward is shareholder activism, said Raymond Baltz, global corporate practice leader at King & Spalding in Atlanta. While not exclusive to the South, the region will be affected strongly by such activism because of its large population of midcap public companies. Midcaps make inviting targets as they can be less well prepared for activism compared to larger public company peers, Baltz said. 

Strategics and private equity firms are closely following activist campaigns, as they look to profit from activist pressure by swooping in to undertake whole-company acquisitions, corporate carve-outs or going-private transactions, Baltz said. He pointed to’s [NASDAQ:AMZN] USD 13.5bn acquisition of Texas-based Whole Foods Market [NASDAQ:WFM] as a prime example of activist-driven M&A. 

Lacher agreed that activism is on the rise and does help M&A, but noted that it’s unclear whether this is a long-term trend or simply a cyclical strategy that is currently en vogue. 

Uncertainty, such as it exists, is tied to events at the national level rather than dynamics of the South itself, according to Baltz. He flagged federal tax reform and the political environment in Washington along with high valuations in the public markets as areas creating general uncertainty. 

Ambiguity around tax reform can be both a catalyst for deals and a drag, Lacher said. Some sellers may seek to exit before a deal in Washington is finalized, while other potential sellers may put off a sale hoping tax rates go down, he added. 

The consensus has been that tax reform would be next on the list for the Trump administration after healthcare, said Alston & Bird’s Balloon. However, healthcare has gotten bogged down so it’s not clear when taxes may get addressed, he said. 

Given those considerations, Balloon said he sees “cautious optimism” regarding M&A in 2H17 across the Southern US. Deals will be done in a “circumspect way with an eyeball on the political climate.” 

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