President Barack Obama's infrastructure stimulus funding could lead to consolidation in industries such as road and bridge construction, engineering, renewable energy, power transmission, and environmental services, said industry bankers and an analyst.
But M&A activity is expected to feature more of the distressed company sales that were prevalent in the 1980s, said one banker, with the promised stimulus spending not likely to be enough to sustain the capacity that several engineering and construction firms have developed in recent years. "We'll probably see [M&A] activity, but it'll be a lot more on the distressed side," the banker said. Some companies focused on heavy civil engineering, infrastructure projects and government work will be more robust, although they will face added competition from others trying to enter their sectors.
Companies likely to be buyers include strategics like McDermott International, KBR, Shaw Group, Fluor Corporation, Jacobs Engineering, Foster Wheeler, General Cable, Chicago Bridge & Iron, and financial buyers such as Texas Pacific Group, Macquarie Infrastructure Group and First Reserve.
Although M&A activity has frozen in recent months, with large engineering firms not wanting to take decisive action in the current economic uncertainty, that is expected to change this year, said the banker. "A few buyers are saying 'let's be aggressive' in the search process, but they still have dry powder. They're going to look for opportunities this year," said the banker. Jacobs, Fluor and McDermott are among such companies, the banker added.
M&A activity will depend on what projects are prioritized in the coming year, said the analyst. If less technical and less complicated projects, such as building roads, are emphasized, then the larger companies may not feel the need to bring on new expertise. If, however, a decision is made to redo the electrical grid, a project of that scale and scope would incite more M&A activity. General Cable has been involved in a lot of that type of work, noted the analyst.
Engineering companies specializing in environmental retrofitting may become targets if government and other buildings are retrofitted for energy efficiency, as Obama's economic recovery plan calls for, said a second industry banker and the analyst. The first banker said retrofitting would positively impact electrical contractors, such as EMCOR Group and Integrated Electrical Services (IES). IES was cited as a target in a recent report by this news service after hedge fund Tontine said it would exit its 58% holding.
Many of those electrical contractors, in addition to construction companies and subcontractors, must obtain bonding credit or a surety bond to guarantee their work. Obtaining bonding credit, already difficult in today's frozen credit markets, is expected to become even tougher, meaning that those that rely on bonding credit are most at risk of being taken over, said the first banker.
As new technologies are developed, engineering companies that design technology prototypes, such as San Francisco-based GreenMountain Engineering, could become targets, the second banker added.
Infrastructure building will likely be in power generation, but whether it will be in wind, coal or nuclear power is yet to be seen, said the analyst.
Private equity, as well as foreign investment, will have a significant role to play in investing in American infrastructure, said the second banker, the analyst, and a third banker.
The third banker thought that 2009 could bring further public/private partnerships such as Macquarie Infrastructure Group's acquisition of the Chicago Skyway, which was the first privatization of an existing road in the US, according to the Macquarie website.
Private equity firms such as First Reserve and Texas Pacific will find this "the time to make a killing," said the analyst. "All investment bankers should be out pitching deals." Many private equity firms are opening new energy funds that will encompass infrastructure. However, there may be reluctance to draw down their full commitments from their limited partners, as no one is willing to dip into their cash right now, the analyst said.
The first banker said private equity's inability to borrow at their traditionally high levels means private equity houses will more likely make all-equity transactions, focusing on buying minority stakes and bolt-on acquisitions for their existing portfolios. Many private equity firms are also expected to unload their holdings and are being targeted by investment banks seeking to generate deals, according to the first banker. Private equity firm JH Whitney bought FNF, an Arizona-based heavy highway contractor, in May 2008, although since that deal involved little leverage, the owner is likely to sit on it until Arizona state reverses its recent reduction in spending, the first banker speculated.
The third banker said that, since public companies are trading at such low price-to-earnings multiples, few private companies will be willing to sell at those multiples. More likely, some of the engineering and construction companies with market capitalizations between USD 500m and USD 3bn, such as Foster Wheeler or Shaw Group, may consider stock-for-stock mergers in order to gain scale, geography and capabilities.
However, the first banker and analyst did not agree, saying that M&A between larger players was unlikely. Companies such as Jacobs, Foster Wheeler, Shaw, McDermott, KBR, General Cable and Chicago Bridge & Iron will likely buy smaller engineering companies that have patented technology and techniques, said the analyst. KBR bought BE&K for USD 550m in May 2008, which was a service provider, and those kinds of deals will likely continue in 2009, he speculated.
by Hana Askren, Mark Andress and Bryce Covert
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