While high financing costs and lingering recession fears have yet to stymie contractors’ strong backlog levels, those headwinds have slowed the mergers and acquisitions market for construction and engineering firms, said Tristan Tahmaseb, vice president at ButcherJoseph & Co., a St. Louis-based boutique investment banking firm.
M&A activity surged after the pandemic, especially due to public funding from the $1.2 trillion Infrastructure Investment and Jobs Act, the $52 billion CHIPS Act and the $485 billion Inflation Reduction Act. For example, IIJA juiced M&A deals in the construction sector to surge from an average of about 100 deals per quarter going back to 2017 to double that pace after its passage, according to Tahmasab.
But recent financing issues and concerns around an economic slowdown are causing firms to hit the brakes on M&A activity, said Tahmasab. Still, select M&A deals are closing 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 player 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 Greenwich, Connecticut-based private equity firm, acquired the Ardurra Group, an engineering and design services firm, for an unknown amount.
Here, Tahmaseb talks with Construction Dive about the mergers and acquisitions landscape, deals and overall outlook for the remainder of the year.
Editor’s note: This interview has been edited for clarity and brevity.
CONSTRUCTION DIVE: What are some key trends in the M&A landscape?
TRISTAN TAHMASEB: M&A activity increased toward the end of the second quarter in 2023 as inflation began to show signs of easing, and the Federal Reserve paused interest rate hikes. The financing environment changed, with lower loan-to-cost ratios and higher interest rates reducing project volume.
Lower project volumes left buyers sitting on the sidelines to see what happens with interest rates and other financing terms. Many new projects that would have been profitable in prior years are not penciling out in the higher rate and construction cost environment.
As noted, M&A trends have experienced a slowdown owing to the prevailing financing landscape. Nevertheless, substantial reserves of dry powder are poised for allocation. While premium companies continue to witness robust activity, enterprises with stagnant performance encounter challenges in attracting buyers.
Why did the pandemic accelerate M&A activity in the construction industry?
Lower interest rates in 2021 and 2022 catalyzed heightened M&A activity within the construction industry. With borrowing costs at historically low levels, construction companies found it more cost-effective to finance acquisitions and new projects. Lower interest rates made it financially feasible for firms to pursue expansion through M&A and encouraged them to capitalize on growth opportunities.
The pandemic, however, extended construction timelines due to pandemic-related regulations and staffing bottlenecks. Companies are still addressing mounting volumes of backlogged projects.
Recent construction transactions have been influenced by the health of a company's backlog, but lingering macroeconomic uncertainty has injected doubt into this backlog's value. Given this, companies require a robust backlog to be attractive targets for acquisition.
What is the outlook for the rest of 2023?
A rebound in the sector's M&A activity is anticipated in the second half of 2023, contingent upon improved economic confidence and more stable financing conditions.
The sector is expected to witness increased divestitures as corporations raise capital to fund growth. Private equity's role in this recovery largely depends on a rebound in the debt market and potentially lower valuation multiples.
Investors looking to utilize their available capital might find opportunities to acquire companies that went public in the post-COVID wave.
Despite the uncertainty in the credit market, persistent dealmakers 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 might offer a unique opportunity for engineering and construction investors with strong conviction, especially as signs of a recovery in the housing market become visible.
Secular shifts toward new markets will continue to drive persistent M&A activity, focusing on sectors like data centers, transportation and healthcare. Certain financial and strategic buyers wanting to diversify their offering may ascribe higher multiples to companies servicing these emerging market trends.
Location also remains a key driver of M&A, with certain regions witnessing strong buyer interest.