Precision engineering market deals

Berkshire Hathaway acquires precision engineering company Precision Castparts Corp.

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Introduction

 

Berkshire Hathaway recently announced that it is acquiring US precision engineering conglomerate Precision Castparts Corp. for $37.2 billion. Precision Castparts is one of the largest precision engineering companies in the world and represents the largest investment made by Berkshire Hathaway to date. It is noteworthy not only because of the scale of the acquisition but of the value created by the company over 50 years through strategic acquisitions of precision engineering companies and the aggregation of those businesses into a single profitable entity. Precision Castparts was established in 1949 and is a tangible example of the value that can be created by a ‘buy and build’ strategy, which is CIM’s own strategy within the UK. This deal is therefore of high importance for the sector as a whole and demonstrates the strong exit market for aggregated precision engineering businesses. It is also evidence one of the world’s most prolific investors’, Warren Buffet, belief in the strategic value of this asset class.

 

The principal reason given for the acquisition is the company’s longstanding and embedded relationship with some of the most prominent global aerospace manufacturers, industrial producers, and energy providers. Berkshire Hathaway also appears to be counting on a continued increase in air travel need for more efficient aircrafts and a recovery in the energy markets.

 

The deal

 

The deal is valued at $37.2 billion, including debt, or $235 per share. This works out as a price-to-earnings (P/E) ratio of about 22.4 x last year’s earnings and an enterprise value (EV) of ca. 13.2 x last year’s EBITDA. These numbers clearly showcase the premium paid in the higher value exit range with respect to the sub £15 million range where exits often take place in the 6-8 x EBITDA range.

 

The Business and Sector Exposure

 

This valuation makes Precision Castparts one of the largest precision engineering companies in the
world. The company operates globally with over 150 factories worldwide.Precision Castparts can be divided into three main business segments: Investment Cast Products, Forged Products and Airframe Products. These business segments serve the following sectors (FY2015):

 

Aerospace – 70%
Power – 17%
General Industrial & Other – 13%