The first half of 2020 portrayed quite a dichotomy. The three major sectors of construction start types – residential, non-residential building and non-building – posted year-over-year gains in January, February, and March. Activity nearly halted for non-essential projects in April and May, then rebounded nicely in June. Year-to-date total construction starts were down 14% compared with the same period in 2019 per Dodge Data. Residential starts dropped 5%, non-residential decreased 22% and non-building starts fell 14%.
M&A activity during the period followed a similar path. As the calendar turned to 2020, backlogs were strong, sellers were preparing for transactions and buyers (both strategic and financial) were open for business. The credit markets were wide open. By April, many M&A processes were put on hold as buyers and sellers agreed to take a pause and focus on their own near-term COVID-19 concerns. Lenders paused to focus on their existing portfolios and the ability to accurately project 2020 results became murky for many potential sellers.
The pause in the market allowed sellers to prioritize efficiencies within their companies, with many seeing decreased overhead due to lower non-job costs and higher utilization rates. Several segments (such as transportation and water) saw projects accelerated, boosting revenues. Advisors were able to work with their clients to be ready to approach the market once the overall mood shifted.
Now, buyers are ready, credit markets are reopening (albeit at potentially higher rates and lower total leverage appetites) and halted projects are beginning to move. It has become a sellers’ market again, with demand for healthy, sustainable businesses that are positioned for growth for the remainder of 2020 and into 2021 outweighing supply of such firms. This should bode well for valuations and activity in the coming quarters.
Average last-12-month (LTM) EBITDA has improved year over year for Engineering and Infrastructure Services firms and remained flat for Industrial Contracting. This is a good sign that firms were able to withstand the pandemic’s effects for now. LTM gross margin has held steady or improved for all three categories. Stock market declines and concerns about future revenues have negatively impacted market capitalizations and enterprise values across sectors.
Other than a few specific situations, the segment saw improving LTM EBITDA and gross margins. Average market capitalizations rebounded from March lows. M&A activity was somewhat muted with no major transactions announced. Significant transactions include:
While the performance for many public firms in the Industrial Contracting and Infrastructure Services segments was negatively impacted during the first half of 2020, M&A activity continued on its strong pace seen in 2019. Both private equity-backed firms and pure strategic buyers were active in the segments. Significant transactions include:
Industry Indexes for this report:
Engineering: ACM, FLR, J, KBR, NVEE, PSN, LSE:RPS, TSX:SNC, TSX:STN, TTEK, ASX:WOR, TSX:WSP
Industrial: AEGN, XTRA:GBF, FIX, DY, EME, LMB, MTZ, MTRX, MYRG, PRIM, PWR, TISI, APG, IESC
Infrastructure: TSX:ARE, LSE:BBY, ROAD, GVA, GLDD, IEA, ORN, OM:SKA B, STRL, SUM, TPC