August 30, 2010

Construction, engineering companies mergers increased in Q2: Report

VINCE VERSACE

staff writer

Construction and engineering companies globally continued to grow through acquisition in the second quarter of 2010 but though there were more deals, their overall value declined, a PricewaterhouseCooper report says.

“Although deal value declined in the second quarter, the first half of the 2010 ended strong compared to the recession lows of 2009,” said Sal Bianco, national leader of the engineering and construction practice at PwC. “The outlook for the industry looks positive as we expect overall deal activity to continue to build momentum throughout the rest of the year, driven by reduced risk aversion and a stronger global economy.”

There were 44 mergers and acquisition (M&A) deals announced in the second quarter of 2010 totalling US$11.8 billion in value compared with the 34 deals worth US$22.5 billion in the first quarter. Of these 44 transactions, 40 (almost 91 per cent) did not involve a US entity, noted PwC.

Overall, North America deal activity declined from 21 per cent in the first quarter to 11 per cent in the second. PwC estimates this decline is partly driven by a slowed United States construction industry where many engineering and construction firms are feeling the pinch of lower revenue and reduced margins.

The trend of increased M&A deals but at smaller value concurs with the assertions of Canadian industry analysts in June about Canada’s current M&A market. These analysts noted that acquisitions of smaller companies in Canada are still to be expected because construction is fragmented but large deals are not expected.

In late June, Aecon Group, Canada’s largest publicly traded construction firm, made a $59 million CDN purchase of 15 per cent of Alberta’s Churchill Corp.

Aecon Group has been steadily increasing its stake in Western Canada through acquisition including a $220 million CDN purchase of Lockerbie & Hole, one of the region’s largest mechanical contractors.

Aecon also purchased South Rock, a major Calgary-based roadbuilding firm.

Smaller deals with undisclosed values remain the drivers of overall M&A activity, noted the PwC report. Deal activity for transaction with disclosed values between US$50 million and US$250 million improved while large and mega-deal activity (transaction with a disclosed value of over $1 billion) declined compared with the first quarter.

There were two mega-deals in the second quarter, down from the four in the first quarter.

In June, United Kingdom-based Acergy MS Ltd.’s offered US$2.5 billion for Norway-based Subsea 7 Inc. and French-based Eiffaire SAS acquired French-based Societe des Autoroutes Paris-Rhin-Rhon SA for US$1.05 billion.

Interestingly, though overall United States M&A activity lagged, the construction machinery and materials sector saw Schlumberger Ltd.’s make an offer of US$11.04 billion for Smith International Inc. in February, which ranks as the top mega-deal of the year.

PwC also reported the areas of construction and construction machinery and materials accounted for 48 per cent of the M&A deals worth $50 million in the second quarter of the year, a three per cent climb from the first quarter of 2010.

Civil engineering accounted for 16 per cent of that volume in the second quarter compared with 12 per cent earlier in the year.

PwC stated that now “is a good time” for construction and engineering companies to review past transactions “with an eye toward completing integrations that were not finalized” during the building boom.

With credit access loosening, equity markets advancing, and economic growth rates stabilizing, the environment for increased M&A activity is growing, the report concludes.

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