Short Term Headwinds. Long Term Opportunities.
While the COVID-19 pandemic and related recession has caused a near-term contraction of the Agricultural (Ag) Equipment market and challenged owners and operators, we believe the long-term outlook remains strong with unique opportunities for certain industry players on the horizon.
According to Grandview Research, the current U.S. Ag equipment market size is estimated to be $156 billion. While some have forecasted the industry may decline 15%- 25% in 2020 due to acute decreased demand, growth may return in 2021. The decreased demand for agriculture production has been driven in part by restrictions on trade and overseas shipments of agricultural products (already affected by tariffs), as well as disruptions in the supply chain resulting from the temporary closure of restaurants and hospitality venues. However, some Ag equipment dealers that are more consumer oriented have seen sales increase as homeowners look to upgrade their lawnmower or home tractor while they spend more time at home.
The Association of Equipment Manufacturers (AEM) conducted a survey of Ag Equipment CEOs, with 57% responding that COVID-19 was negatively impacting their business. The decline could have been more pronounced, but Homeland Security designated the entire food and agriculture production system “critical infrastructure”, ensuring continuity and potentially paving the way for incentives and available financing to maintain production.
H2A (Ag VISA) delays and general labor shortages will continue to be a major challenge faced by growers, and food and ingredient processors, as COVID-19’s impact on the domestic and immigrant labor supply continues. However, the lack of available labor and the risk of COVID-19 infections among workers could ultimately boost sales of Ag related automation/robotics equipment in the long term, enabling farms to run more efficiently and potentially reduce worker headcount needs.
The current challenges have without a doubt significantly affected the industry, but hardship and change can often lead to opportunity.
M&A Activity and Two Consolidation Approaches
While agribusiness M&A has declined roughly 30% from prior years, there are still substantial opportunities for investment and consolidation. We have seen with Cascadia’s Food and Ag clients an increased awareness of risk. Sellers are carefully considering the most opportune timing and are most concerned with certainty of close. Deals are still getting done, but they are taking longer to complete in most cases.
There are several current trends that drive Ag equipment dealer consolidation. For one, dealer consolidation is closely tied to overall farm consolidation trends. Larger dealers with more product breadth and number of locations can better meet the needs of larger and better capitalized farms. Secondly, an increase of owners approaching retirement with a lack of successor creates acquisition opportunities as sellers seek liquidity to retire. According to a Farm Equipment survey, 38% of dealer-principals were 61 years or older and 75% were 51 years or older. Furthermore, major equipment manufacturers, whether it be John Deere, New Holland or Kubota recognize the efficiencies that can come with dealer consolidation, including cost synergies and streamlined operations in a given geography, and support the acquisition process for qualified and vetted buyers.
There are two consolidation options that equipment manufacturers might support. In either case, it will be important for owners to fully vet the potential counterparty to ensure their long term goals, timelines and priorities are aligned.
The first consolidation approach, and the one most commonly supported by equipment manufacturers, is for a dealer to sell to another owner-operator. This option provides a high level of comfort for an OEM if the new owner has experience in the sector and is focused on the long term.
An alternative approach is to join a dealer roll-up backed by an investor group or private equity firm. The benefits of joining an investor backed roll-up include:
- The ability to maintain an equity stake in the go-forward entity with meaningful upside.
- Achieving valuation multiple expansion upon an eventual liquidation event or full sale. While the valuation for a smaller dealer might equate to 4-6x trailing EBITDA in the current market, or equipment value plus 1x blue sky value, a larger dealership with multiple locations and scale may command premium multiples (7-8x trailing EBITDA), thus an owner can realize substantial value by staying involved and rolling ownership.
- Utilizing the investor group’s institutional knowledge and resources, such as capital markets expertise, board level advice, and back office and HR functions.
- Accessing new credit relationships and potential follow-on equity capital to weather challenging times.
Cascadia’s View and Recent Activity
Cascadia Capital’s Food and Agribusiness team is one of the most active in the industry with a long track record of achieving successful outcomes for its clients. We have close lender relationships and access to various capital sources, including family offices and high net worth individuals that are looking for long term, stable investment opportunities.
We strongly believe in the future success of the Ag equipment industry, despite the short term headwinds. As such, we are actively working on a roll-up of smaller Ag equipment dealers in the Northwest via our Private Capital group, Cascadia’s affiliated merchant bank. The goal is to combine three to five equipment dealerships over the next 12-24 months, to create a regional player that is controlled and headquartered locally in the Pacific Northwest.
Please reach out to us using the contact information below if you would like to learn more about our thesis and focus on the Ag equipment sector, or to discuss potential opportunities for your own business, employees, and contacts.
You can learn more about our Food, Beverage & Agribusiness here.