Expect more deals after Prysmian’s acquisition of Encore Wire.
Cable makers know about making connections. Prysmian, the world’s largest, this week used that expertise to agree to buy Texas-based Encore Wire for €3.9bn. There will be more hook-ups to come.
Soaring demand for subsea interconnector cables means substantial cash generation for their manufacturers. Italian group Prysmian had promised to find bolt-on deals in profitable US markets and has ample room for more.
It is in an enviable position as one of just a few manufacturers able to meet rising demand for high voltage connectors that link electricity grids and offshore wind farms. The group’s order book grew more than threefold last year to about €20bn today, most of that in Europe. The situation in North America is different: the need for subsea cables is currently less but the US grid is in desperate need of upgrades. There is also a renewable energy boom on the horizon from the Inflation Reduction Act.
Encore brings with it $2.6bn of annual sales in low and medium voltage cables, mostly used in the building industry. The deal might seem an odd choice given investors’ current excitement around the high voltage sector: share prices for Prysmian and Denmark’s NKT, which is more exposed to high voltage, have risen 84 per cent and 146 per cent respectively over the past three years.
But, along with Nexans of France, these three groups control 70 per cent of the supply of high voltage cabling. Capacity additions are coming from capital spending. There is little room for consolidation or growth through acquisitions. Excess cash has to go somewhere, other than back to shareholders or paying down debts.
Getting into low and medium voltage investments makes sense. Nexans recently identified 130 targets globally that fit the bill. Just eight of these though are North American, where markets are already highly concentrated.
That explains Encore’s profit growth in recent years: gross margins jumped from 15 per cent in 2019 to more than 35 per cent in 2022. Margins have drifted lower since but strong customer demand and higher copper prices suggest they will remain above pre-pandemic levels for some time yet.
Consolidation will insulate profits in lower voltage segments further. Expect more deals: free cash flow at Prysmian is expected to be €639mm this year and continue rising. Add in NKT and Nexans, and sector free cash flows over the next five years total €6.2bn according to Visible Alpha. Plenty to keep the buzz at cable makers going.
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