This year saw a shift in tone in construction M&A that reflects the increasing confidence in the wider market.
Although the volume and value of deals was down year on year, the market has been moving away from distressed deals to healthier M&A activity.
“2013 appears a more prosperous year than previous years for M&A activity in the construction sector,” says PwC UK engineering and construction leader Chris Temple.
“As the industry is coming out of the downturn, companies are thinking about the medium term and looking for opportunities to combine with others. M&A in a downturn is typically focused on distressed activity but as the market picks up it becomes more focused on healthy M&A.”
In 2013 there have been several big strategic deals with “solid rationale”, according to Adrian Pritchard, construction mergers and acquisitions specialist at Nash Fitzwilliams.
“From 2009 to 2012 lots of deals were people getting themselves out of problems, or acquirers taking advantage of distress in the market,” he says. “But 2013 saw some solid strategic deals together with a series of strategic add-ons.”
“In the broader market, facilities management has picked up, with some divesting and investing going on there”
Jan Crosby, KPMG
Mr Pritchard highlights Kier’s acquisition of May Gurney in July, GDF Suez’s purchase of Balfour Beatty Workplace in August and Schneider Electric’s acquisition of Invensys in July.
One area leading the upturn in M&A is housing. “It’s been the year of housebuilding and related industries such as property services,” says KPMG head of construction M&A Jan Crosby.
“In the broader market, facilities management has picked up, with some divesting and investing going on there.”
The rise of FM
Mr Pritchard says: “FM is where many construction services firms want to be at the moment. “Companies like the long-term contracts and predictability of FM - Emcor closed down its M&E business to focus on FM, Mitie did the same.”
But activity is not all one way. Bam Construct acquired FM firm Sutton Group in January but Balfour Beatty sold its FM arm in August. “Some FM firms want to grow what they’re doing in that area while others want to stick with their existing strategy,” Mr Crosby says.
“Companies are either moving into or out of FM; this will continue in 2014.”
“The market has changed - many deals are not about diversification; instead it’s about strengthening the existing platform”
Adrian Pritchard, Nash Fitzwilliams
The Bam Construct deal is an example of another type of M&A that has been common in 2013: lower-risk, strategic add-ons.
These include SIG’s acquisition of United Roofing in March and SK Sales in May, Carillion’s purchase of John Laing’s FM business in October and Interserve’s purchase of Paragon Management in May.
“Low risk add-ons are the next logical step for acquirers who remain risk-averse but are looking to add strength and exploit synergies,” Mr Pritchard says.
“The market has changed - many deals are not about diversification; instead it’s about strengthening the existing platform.”
Distressed deals still around
Nevertheless, there are still deals emerging due to the downturn.
“We have still seen some distressed deals, where companies had little chance of surviving on their own,” Mr Temple says.
Mr Pritchard cites the exit by Lloyds bank of housebuilder Countryside, and subsequent sale to private equity firm Oaktree in February. “There are still some big deals happening as a result of the years of distress but we’re coming to the end of those,” he says.
As the market improves, M&A activity will rise. “Corporates are still looking to do deals and dispose of business units,” Mr Temple says.
“Strategic acquisitions will increase as companies focus on future demand in sectors such as rail, energy and infrastructure”
Jan Crosby, KPMG
“Some firms are refocusing on core markets or shifting towards more specialist areas. We’ll continue to see distressed M&A but healthy deals are increasing.”
Mr Crosby believes government spending announcements have given confidence to certain areas and this will be reflected in M&A activity.
“I don’t think there are going to be many desperate deals,” he says. “Strategic acquisitions will increase as companies focus on future demand in sectors such as rail, energy and infrastructure.”
Mr Pritchard expects the return of management buyouts in 2014. “There were not many ‘normal’ MBOs in 2013; instead there were many which resulted one way or another from the sector’s distress.
“Pre-2007 would have seen more MBOs and as leverage returns you will see them coming back.”
Share price factor
An indicator that M&A activity will increase in 2014 is the rise in construction firms’ share prices.
The FTSE 350 Construction and Materials index has risen from a low of 2,905 in August 2011 to 4,286 as of early December - up 50 per cent.
“Now we can see share prices of global construction companies are increasing - the perception of reduced risk and expectations of growth are driving up share prices,” says Nash Fitzwilliams M&A specialist Adrian Pritchard.
“When share prices rise an increase in M&A activity should follow, as shareholders demand growth. This leads companies to start taking risk again.”