Although high financing costs and lingering recession fears have not yet deterred contractors. high levels of delayThose headwinds have slowed the M&A market for construction and engineering firms, said Tristan Tahmaseb, vice president at ButcherJoseph & Co., a boutique investment banking firm based in St.
M&A activity increased after the pandemic, particularly due to public funding from the $1.2 trillion Jobs and Infrastructure Investment Act, the $52 billion CHIPS Act, and the of reducing inflation of 485 billion dollars. For example, IIJA leveraged M&A deals in the construction industry to go from an average of about 100 deals per quarter since 2017 to double that pace after its approval, according to Tahmasab.
But recent funding problems and concerns about an economic slowdown are causing companies to slow down M&A activity, Tahmasab said. Still, some M&A deals will close in 2023, he added.
For example, Denver-based Summit Materials acquired cement producer Argos USA for $3.2 billion in September, making the asphalt contractor the fourth-largest cement maker in the United States. Los Angeles-based asset management firm Oaktree Capital Management acquired Enercon Services, an engineering and environmental services company, for $160 million in May. In February, Littlejohn & Co., a private equity firm based in Greenwich, Conn., acquired Ardurra Group, an engineering and design services firm, for an undisclosed amount.
Here, Tahmaseb talks to Construction Dive about the M&A landscape, deals and the overall outlook for the rest of the year.
Editor’s Note: This interview has been edited for clarity and brevity.
CONSTRUCTION DIVE: What are some of the key trends in the M&A landscape?
TRISTAN TAHMASEB: M&A activity increased towards the end of the second quarter of 2023 as inflation began to show signs of easing and the Federal Reserve halted interest rate hikes. The financing environment changed, with lower loan-to-cost ratios and higher interest rates reducing project volume.
Tristan Tahmaseb
Permission granted by ButcherJoseph
Lower project volumes left buyers sitting on the sidelines to see what happens with interest rates and other financing conditions. Many new projects that would have been profitable in previous years are not being pulled off in the environment of higher construction rates and costs.
As noted, M&A trends have experienced a slowdown due to the prevailing financial landscape. However, substantial reserves of dry powder are ready for allocation. While premium companies continue to witness robust activity, companies with stagnant performance face challenges in attracting buyers.
Why did the pandemic accelerate M&A activity in the construction industry?
Lower interest rates in 2021 and 2022 catalyzed increased M&A activity in the construction sector. With borrowing costs at historically low levels, construction companies found it more profitable to finance acquisitions and new projects. Lower interest rates allowed companies to continue expanding through mergers and acquisitions and encouraged them to take advantage of growth opportunities.
The pandemic, however, extended construction timelines due to the pandemic regulationsi personnel bottlenecks. Companies are still tackling growing volumes of backlogged projects.
Recent construction transactions have been influenced by the health of a company’s backlog, But persistent macroeconomic uncertainty has cast doubt on the value of this delay. Faced with this, ccompanies require a robust lag to be attractive objectives for the acquisition.
What are the forecasts for the rest of 2023?
A pick-up in mergers and acquisitions activity in the sector is expected during the second half of 2023, conditional on an improvement in economic confidence and more stable financing conditions.
The sector is expected to see increased divestments as corporations raise capital to finance growth. The role of private equity in this recovery is largely dependent on a rebound in the debt market and potentially lower valuation multiples.
Investors looking to use their available capital could find opportunities to acquire companies that went public during the post-COVID wave.
Despite credit market uncertainty, persistent businesses can still find attractive M&A opportunities.
Companies with healthy balance sheets and financial flexibility are identifying opportunities to acquire strategic assets to position themselves as market leaders. This period could offer a unique opportunity for engineering and construction investors with a strong conviction, especially as signs of recovery in the housing market become visible.
Secular shifts into new markets will continue to drive persistent M&A activity, with a focus on sectors such as data centers, transportation and healthcare. Some financial and strategic buyers looking to diversify their offering may attribute higher multiples to companies that service these emerging market trends.
Location also continues to be a key driver of M&A, with certain regions witnessing strong buyer interest.
