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
Healthcare Facilities | Jul 6, 2015
The main noisemakers in healthcare facilities: behavior and technology
Over the past few decades, numerous research studies have concluded that noise in hospitals can have a deleterious effect on patient care and recovery.
BIM and Information Technology | Jul 6, 2015
New documentary shows Legos as touchstones of creativity
The film's narrator, actor Jason Bateman, says it’s a story “about a simple toy and how its unique properties ushered in a new era of creativity for a whole generation.”
Contractors | Jul 1, 2015
ABC: Nonresidential construction spending continues growth with stellar May
Through the first five months of 2015, nonresidential construction spending is having its second best year since the Census Bureau began tracking the metric in 2002, according to ABC.
High-rise Construction | Jun 23, 2015
The world's best new skyscrapers for 2015
One World Trade Center and Abu Dhabi's Burj Mohammed Bin Rashid Tower are among the four towers named Best Tall Buildings by the Council on Tall Buildings and Urban Habitat.
BIM and Information Technology | Jun 21, 2015
11 tips for mastering 3D printing in the AEC world
Early adopters provide first-hand advice on the trials and tribulations of marrying 3D printing with the science of building technology.
Engineers | Jun 18, 2015
Architecture and engineering profit margins deliver third consecutive year of growth
Operating profits of AE firms have reach their highest level since 2009, according to a new report by PSMJ Resources.
BIM and Information Technology | Jun 16, 2015
What’s next for 3D printing in design and construction?
The 3D printer industry keeps making strides in technology and affordability. Machines can now print with all sorts of powderized materials, from concrete to chocolate.
Engineers | Jun 15, 2015
WSP expands Houston operations following ccrd acquisition
Aside from bolstering its Houston operations, the ccrd acquisition expanded WSP’s presence in markets throughout the Southeast and south-central U.S.
Office Buildings | Jun 12, 2015
Houston's energy sector keeps office construction humming
Colliers International projects continued expansion this year in its quarterly report on national office market.
Smart Buildings | Jun 11, 2015
Google launches company to improve city living
The search engine giant is yet again diversifying its products. Google has co-created a startup, called Sidewalk Labs, that will focus on “developing innovative technologies to improve cities.”
