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
| Feb 11, 2011
Grocery store anchors shopping center in Miami arts/entertainment district
18Biscayne is a 57,200-sf urban retail center being developed in downtown Miami by commercial real estate firm Stiles. Construction on the three-story center is being fast-tracked for completion in early 2012. The project is anchored by a 49,200-sf Publix market with bakery, pharmacy, and café with outdoor seating. An additional 8,000 sf of retail space will front Biscayne Boulevard. The complex is in close proximity to the Adrienne Arsht Center for the Performing Arts, the downtown Miami entertainment district, and the Omni neighborhood, one of the city’s fast-growing residential areas.
| Feb 11, 2011
Chicago architecture firm planning one of China’s tallest towers
Chicago-based Goettsch Partners was commissioned by developer Guangzhou R&F Properties Co. Ltd. to design a new 294,570-sm mixed-use tower in Tianjin, China. The Tianjin R&F Guangdong Tower will be located within the city’s newly planned business district, and at 439 meters it will be one of China’s tallest buildings. The massive complex will feature 134,900 sm of Class A office space, a 400-key, five-star hotel, 55 condominiums, and 8,550 sm of retail space. The architects are designing the tower with multi-story atriums and a high-performance curtain wall to bring daylight deep into the building, thereby creating deeper lease spans. The project is currently finishing design.
| Feb 11, 2011
Two projects seek to reinvigorate Los Angeles County medical center
HMC Architects designed two new buildings for the Los Angeles County Martin Luther King, Jr., Medical Center as part of a $360 million plan to reinvigorate the campus. The buildings include a 120-bed hospital, which involves renovation of an existing tower and several support buildings, and the construction of a new multi-service ambulatory care center. The new facilities will have large expanses of glass at all waiting and public areas for unobstructed views of downtown Los Angeles. A curved glass entrance canopy will unite the two buildings. When both projects are completed—the hospital in 2012 and the ambulatory care center in 2013—the campus will have added more than 460,000 sf of space. The hospital will seek LEED certification, while the ambulatory care center is targeting LEED Silver.
| Feb 11, 2011
Sustainable community center to serve Angelinos in need
Harbor Interfaith Services, a nonprofit serving the homeless and working poor in the Harbor Area and South Bay communities of Los Angeles, engaged Withee Malcolm Architects to design a new 15,000-sf family resource center. The architects, who are working pro bono for the initial phase, created a family-centered design that consolidates all programs into a single building. The new three-story space will house a resource center, food pantry, nursery and pre-school, and administrative offices, plus indoor and outdoor play spaces and underground parking. The building’s scale and setbacks will help it blend with its residential neighbors, while its low-flow fixtures, low-VOC and recycled materials, and energy-efficient mechanical equipment and appliances will help it earn LEED certification.
| Feb 11, 2011
Texas megachurch inspired by yesteryear’s materials, today’s design vocabulary
The third phase of The First Baptist Church of Pasadena, Texas, involves construction of a new 115,000-sf worship center addition. Currently in design by Zeigler Cooper, the project will include a 2,500-seat worship center (with circular layout and space for a 50-person orchestra and 200-person choir), a 500-seat chapel (for weddings, funerals, and special events), and a prayer room. The addition will connect to the existing church and create a Christian Commons for education, administration, music, and fellowship. The church asked for a modern design that uses traditional materials, such as stone, brick, and stained glass. Construction is scheduled to begin this summer.
| Feb 11, 2011
Apartment complex caters to University of Minnesota students
Twin Cities firm Elness Swenson Graham Architects designed the new Stadium Village Flats, in the University of Minnesota’s East Bank Campus, with students in mind. The $30 million, six-story residential/retail complex will include 120 furnished apartments with fitness rooms and lounges on each floor. More than 5,000 sf of first-floor retail space and two levels of below-ground parking will complete the complex. Opus AE Group Inc., based in Minneapolis, will provide structural engineering services.
| Feb 11, 2011
Four-story library at Salem State will hold half a million—get this—books!
Salem State University in Massachusetts broke ground on a new library and learning center in December. The new four-story library will include instructional labs, group study rooms, and a testing center. The modern, 124,000-sf design by Boston-based Shepley Bulfinch includes space for 500,000 books and study space for up to a thousand students. Sustainable features include geothermal heating and cooling, rainwater harvesting, and low-flow plumbing fixtures.
| Feb 11, 2011
Green design, white snow at Egyptian desert retail complex
The Mall of Egypt will be a 135,000-sm retail and entertainment complex in Cairo’s modern 6th of October district. The two-story center is divided into three themed zones—The City, which is arranged as a series of streets lined with retail and public spaces; The Desert Valley, which contains upscale department stores, international retailers, and a central courtyard for music and other cultural events; and The Crystal, which will include leisure and entertainment venues, including a cinema and indoor snow park. RTKL is designing the massive complex to LEED Silver standards.
| Feb 10, 2011
Medical Data Center Sets High Bar for BIM Design Team
The construction of a new data center becomes a test case for BIM’s ability to enhance project delivery across an entire medical campus.
| Feb 10, 2011
Zero Energy Buildings: When Do They Pay Off in a Hot and Humid Climate?
There’s lots of talk about zero energy as the next big milestone in green building. Realistically, how close are we to this ambitious goal? At this point, the strategies required to get to zero energy are relatively expensive. Only a few buildings, most of them 6,000 sf or less, mostly located in California and similar moderate climates, have hit the mark. What about larger buildings, commercial buildings, more problematic climates? Given the constraints of current technology and the comfort demands of building users, is zero energy a worthwhile investment for buildings in, for example, a warm, humid climate?
