Engineering & Construction M&A Activity Continues to Decline in Second Quarter, according to PwC
30/8/2012 14:43
M&A Activity Falls to Three Year Low as Global Uncertainty Persists, but Financial Investors Gain Momentum
U.S. Leads Deal Volume Supported by Relative Strength of U.S. Manufacturing Sector
After a sluggish start in 2012, merger and acquisition (M&A) activity in the engineering and construction industry continued to decline in the second quarter of 2012 primarily due to the continuation of the European sovereign debt crisis, the slowdown in the growth of the Chinese economy and overall uncertainty of the sector’s growth prospects, according to «Engineering growth», a quarterly analysis of the global engineering and construction industry by PwC US. However, strong private equity (PE) fundraising in the first half of 2012 has resulted in the resurgence of financial investor activity in the sector.
“Engineering and construction deal making remains tied to the overall condition of the global economy due to the highly cyclical nature of the sector. The fragile recovery of the industry and its heavy dependence on government spending, which is being curtailed in numerous countries, combined with the cautious global outlook, have all contributed to reduced M&A activity,” said H. Kent Goetjen, U.S. engineering and construction leader with PwC. “On a positive note, there has been increased participation on the part of financial investors, who usually have shorter investment holding patterns than strategic players.”
In the second quarter of 2012, there were 34 deals with value greater than $50 million totalling $10.1 billion, compared to 47 transactions worth $14.7 billion in the same period of 2011. While deal value and volume also declined sequentially from the first quarter of 2012, which saw 37 transactions totalling $12 billion, average deal value remained flat during that time period at $300 million.
Despite the slowdown in engineering and construction deal making, financial investors continued to gain momentum, generating half of the transactions in the second quarter of 2012 – a level of participation that is higher than the average 10-year rate of about 33 percent. While all deals involving financial investors were local, they included both developed countries and emerging markets. The increased participation of financial investors may be due to both the rising number of PE firms and the greater availability of funds they managed to raise during the second quarter.
The majority of transactions in the second quarter of 2012 were generated by targets in Asia and Oceania as countries such as South Korea, Thailand, Taiwan and Australia increase activity in the M&A arena. Activity in the region was driven by the growing demand for infrastructure and urbanization. The second quarter of 2012 also saw an increase in M&A activity from European acquirers who represented 11 deals worth $4.97 billion, compared to seven deals worth $5.42 billion in the first quarter of 2012, as European companies continued on their path of consolidation, restructuring and divesting.
The United States was the most active individual country with eight deals totalling $2.8 billion. “The bulk of the U.S. transactions were local and involved targets in the construction machinery segments, partly as a result of the relatively strong growth in U.S. manufacturing,” added PwC’s Goetjen.
While the pure engineering and construction contractor segment led in deal activity with 10 transactions in the second quarter, construction materials generated the greatest total value for the second quarter in a row with seven deals totalling $2.36 billion. The growth in these subsectors was driven primarily by the increasing infrastructure and urbanization needs of emerging markets such as Latin America and Asia, and in particular, countries such as Chile and South Korea. The construction materials subsector was another bright spot in the second quarter generating the greatest valuation with activity driven by the high interest among financial investors in targets in the cement and concrete business, one of the most significant materials used in the construction and infrastructure industry.
U.S. Leads Deal Volume Supported by Relative Strength of U.S. Manufacturing Sector
After a sluggish start in 2012, merger and acquisition (M&A) activity in the engineering and construction industry continued to decline in the second quarter of 2012 primarily due to the continuation of the European sovereign debt crisis, the slowdown in the growth of the Chinese economy and overall uncertainty of the sector’s growth prospects, according to «Engineering growth», a quarterly analysis of the global engineering and construction industry by PwC US. However, strong private equity (PE) fundraising in the first half of 2012 has resulted in the resurgence of financial investor activity in the sector.
“Engineering and construction deal making remains tied to the overall condition of the global economy due to the highly cyclical nature of the sector. The fragile recovery of the industry and its heavy dependence on government spending, which is being curtailed in numerous countries, combined with the cautious global outlook, have all contributed to reduced M&A activity,” said H. Kent Goetjen, U.S. engineering and construction leader with PwC. “On a positive note, there has been increased participation on the part of financial investors, who usually have shorter investment holding patterns than strategic players.”
In the second quarter of 2012, there were 34 deals with value greater than $50 million totalling $10.1 billion, compared to 47 transactions worth $14.7 billion in the same period of 2011. While deal value and volume also declined sequentially from the first quarter of 2012, which saw 37 transactions totalling $12 billion, average deal value remained flat during that time period at $300 million.
Despite the slowdown in engineering and construction deal making, financial investors continued to gain momentum, generating half of the transactions in the second quarter of 2012 – a level of participation that is higher than the average 10-year rate of about 33 percent. While all deals involving financial investors were local, they included both developed countries and emerging markets. The increased participation of financial investors may be due to both the rising number of PE firms and the greater availability of funds they managed to raise during the second quarter.
The majority of transactions in the second quarter of 2012 were generated by targets in Asia and Oceania as countries such as South Korea, Thailand, Taiwan and Australia increase activity in the M&A arena. Activity in the region was driven by the growing demand for infrastructure and urbanization. The second quarter of 2012 also saw an increase in M&A activity from European acquirers who represented 11 deals worth $4.97 billion, compared to seven deals worth $5.42 billion in the first quarter of 2012, as European companies continued on their path of consolidation, restructuring and divesting.
The United States was the most active individual country with eight deals totalling $2.8 billion. “The bulk of the U.S. transactions were local and involved targets in the construction machinery segments, partly as a result of the relatively strong growth in U.S. manufacturing,” added PwC’s Goetjen.
While the pure engineering and construction contractor segment led in deal activity with 10 transactions in the second quarter, construction materials generated the greatest total value for the second quarter in a row with seven deals totalling $2.36 billion. The growth in these subsectors was driven primarily by the increasing infrastructure and urbanization needs of emerging markets such as Latin America and Asia, and in particular, countries such as Chile and South Korea. The construction materials subsector was another bright spot in the second quarter generating the greatest valuation with activity driven by the high interest among financial investors in targets in the cement and concrete business, one of the most significant materials used in the construction and infrastructure industry.
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