With the Obama public sector infrastructure boom in the US sending the share price of American construction companies rocketing, the UK construction market is looking decidedly peaky in comparison. By Michael Parkinson
This fact, exacerbated by sterling’s poor performance against the dollar in recent months, means that UK construction companies could well become prime acquisition targets for American firms on a global M&A trail.
People in the know have earmarked this trend as one to watch.
Obama’s pledge to drive over $650 billion into US infrastructure projects has had a positive impact on the US engineering and consultancy market.
Much of the cash injection is being slated for infrastructure projects for work on the likes of roads, bridges and sewerage systems.
Traditionally the US has lagged behind the UK in terms of its commitment to Public Private Partnership (PPP) initiatives.
But this investment has signalled a shift in the US’s attitude to collaborations between public bodies and private companies to revive American public services.
Understandably, Obama’s guarantee of this investment has had positive repercussions for US consultancy and engineering firms and share prices have rallied strongly.
Comparative to their UK counterparts, US construction, engineering and consultancy firms are valued at a premium.
As US firms have been boosted by Obama’s infrastructure pledge and the rise in PPP initiatives, so the performance and valuation of UK firms have waned in the wake of stalled or cancelled UK based PPP projects.
Contractors are tricky to value because of the issues that come with valuing their work in progress.
The major players in the UK are relatively smaller than their US and European counterparts.
The top few are pulling away opening up a bit of a gap on the rest in the UK in terms of size.
It is unlikely you would see an overseas player moving in for the top players in the UK now as they too big.
As for those below it is less clear what an overseas investor would get from acquiring them. Some look attractive, some less so.
Interserve looks to be a stock that is under valued. It has a good exposure to the strong public sector which could create a good opportunity for a large American or European firm looking to break into the UK.
Meanwhile UK consultancies and engineering companies look undervalued, making them attractive takeover targets for companies looking for international expansion.
And US firms, buoyed by burgeoning share prices and the fact that Sterling has done so abysmally against the dollar until recently, have begun to step up their acquisitive activity on this side of the pond.
Noises from US companies active in the UK market confirm this. Aecom, which bought its first UK firm nine years ago recently rebranded its portfolio of European companies, including UK-based Faber Maunsell, to Aecom, in a bid to start positioning its brand as a global one.
Acquisitions of this nature are nothing new – US companies have been active in the UK market for years.
But this trend could increase further in the coming year, as the current climate and market conditions appear to make the prospect of acquisitions by US companies increasingly prevalent.
Michael Parkinson is head of research at Brewin Dolphin Investment Banking