The impact of large, transformational deals by integrated engineers and constructors (E&C) last year will spur continued M&A activity this year, as the largest firms use acquisitions to drive growth and enter new markets, according to the latest edition of FMI’s Mergers & Acquisitions Trends.
“Large, transformational deals highlighted robust M&A activity in the E&C industry in 2014,” said Chris Daum, Senior Managing Director and Head of Investment Banking at FMI. “While there may not be as many marquee transactions thus far in 2015, M&A activity remains very high, particularly among the largest U.S. and international firms that continue to pursue acquisitions as a conduit for growth and margin expansion.”
Large, integrated E&C firms remain acquisitive in 2015 as they look to expand beyond their current maturing markets. Competition among buyers for quality firms of size in attractive growth markets is leading to favorable valuations for sellers. One material challenge that exists for buyers has been the limited number of willing sellers that are of sufficient size to be attractive—e.g., heavy civil contracting firms above $200 million and utility T&D or multi-trade industrial firms above $100 million in value.
Persistent themes in 2015
Persistent themes are shaping broader trends within the industry:
• 2014 was notable for several “mega-deals” in the E&C industry, with three deals accounting for more than $11 billion in transaction value alone. Several multibillion-dollar transactions, including AECOM’s acquisition of URS, SNC-Lavalin’s acquisition of Kentz and the merger of AMEC and Foster Wheeler, reflected the continuing convergence of engineering and construction, the pursuit of global scale by large firms and competition for “mega-projects,” which continue to proliferate.
• Firms tied to public spending remain in a “holding pattern” until spending returns to normalized levels. Most of the new construction currently taking place is in the private sector due to a lack of public spending on infrastructure, and buyers have shifted their appetites toward companies servicing the more active private sectors. Potential sellers who are heavily tied to the public sector may attract limited buyer interest until the outlook for public infrastructure spending improves.
• Interest from strategic buyers exceeds the number of quality, motivated sellers in several industry sectors, driven in part by strong interest from international buyers. The US is the most attractive growth market for international firms faced with flat or declining business in their home markets. International buyers are most interested in national or large regional general contractors, heavy civil contractors, or large specialty firms focused on power, energy and industrial infrastructure.
Varied activity by sector
The carryover of robust M&A activity from 2014 in the E&C industry is most notable among firms involved in the design, construction or maintenance of power, energy, utility and industrial infrastructure. However, building products, energy services and cleantech and specialty contractors with large service and maintenance operations continue to see increased buyer interest.
In Oil & Gas, many private equity firms pulled back from pending upstream and midstream deals in the second half of 2014. The sustained decline in the price of oil is expected to fuel an increase in distressed sales, a decline in valuation multiples and a re-emergence of strategic buyers in 2015. Those financial buyers who remain active in the market are focused on acquiring quality assets at steep discounts. The industrial sector, meanwhile, is growing faster than the overall construction market. For that reason, we expect M&A activity for industrial trade contractors to increase over the next few years. The surge in industrial projects is due to the recent availability of low natural gas prices. This has driven both new and renovation projects, spurring some contractors to look to M&A as a potential solution.
Robust international activity
Many international buyers, meanwhile, who have historically focused on traditional construction firms, are beginning to shift their attention to integrated E&C firms. Many buyers believe the integrated model provides a significant entry point into the U.S. market for firms looking to make their initial acquisition. In addition, international buyers continue to see the U.S. as an opportunity for Public-Private Partnerships (P3) projects, and an integrated platform can provide earlier access to the development of revenue-generating projects.
“While 2015 may not match the level of activity seen in 2014, M&A remains a focal point of strategy for many large domestic E&C firms,” said Daum. “Coupling that with the increased interest from international buyers should allow for a continued robust M&A market in 2015.”
FMI’s Mergers & Acquisitions Trends report can be accessed here.
Related Stories
Education Facilities | Jul 26, 2022
Malibu High School gets a new building that balances environment with education
In Malibu, Calif., a city known for beaches, surf, and sun, HMC Architects wanted to give Malibu High School a new building that harmonizes environment and education.
| Jul 26, 2022
Better design with a “brain break”
During the design process, there aren’t necessarily opportunities to implement “brain breaks,” brief moments to take a purposeful pause from the task at hand and refocus before returning to work.
Building Team | Jul 25, 2022
First Ismaili Center in the U.S. combines Islamic design with Texas influences
Construction has begun on the first Ismaili Center in the U.S. in Houston.
Codes and Standards | Jul 22, 2022
Office developers aim for zero carbon without offsets
As companies reassess their office needs in the wake of the pandemic, a new arms race to deliver net zero carbon space without the need for offsets is taking place in London, according to a recent Bloomberg report.
Codes and Standards | Jul 22, 2022
Hurricane-resistant construction may be greatly undervalued
New research led by an MIT graduate student at the school’s Concrete Sustainability Hub suggests that the value of buildings constructed to resist wind damage in hurricanes may be significantly underestimated.
School Construction | Jul 22, 2022
School integrating conventional medicine with holistic principles blends building and landscape
Design of the new Alice L. Walton School of Medicine in Bentonville, Ark., aims to blend the building and landscape, creating connections with the surrounding woodlands and the Ozark Mountains.
Market Data | Jul 21, 2022
Architecture Billings Index continues to stabilize but remains healthy
Architecture firms reported increasing demand for design services in June, according to a new report today from The American Institute of Architects (AIA).
Market Data | Jul 21, 2022
Despite deteriorating economic conditions, nonresidential construction spending projected to increase through 2023
Construction spending on buildings is projected to increase just over nine percent this year and another six percent in 2023, according to a new report from the American Institute of Architects (AIA).
Mixed-Use | Jul 21, 2022
Former Los Angeles Macy’s store converted to mixed-use commercial space
Work to convert the former Westside Pavilion Macy's department store in West Los Angeles to a mixed-use commercial campus recently completed.
Building Team | Jul 20, 2022
San Francisco overtakes Tokyo as the world’s most expensive city for construction
San Francisco has overtaken Tokyo as the world’s most expensive city for construction, according to a new report from Turner & Townsend.
