Engineering and construction M&A update: First half of 2016

Engineering and construction industry overview and indicators

Baker Tilly Capital, LLC’s engineering and construction M&A newsletter provides an overview of the US engineering and construction sector, including recent performance and M&A trends.

In the US, construction spending is expected to increase at an annual rate of 7 percent between 2016 and 2020. Analysts predicted that 2016 would be a strong year for the industry with 6 percent growth estimated. However, after steady growth for several months through early 2016, nonresidential construction spending growth is struggling to maintain momentum.

While nonresidential construction spending through the first six months of this year is still 5.3 percent above the same period in 2015, monthly spending actually fell for the third straight month (down 1.0 percent from May 2016 to June 2016) according to analysis of US Census Bureau data. In addition, the amount of nonresidential construction value put in place has declined by 1.1 percent compared to June 2015, with private spending up 2.5 percent and public spending down 5.9 percent.

Construction material prices have risen for four consecutive months, increasing by 1.1% in June 2016. However, prices remain 2.5% below the level a year ago. Recent price increases were primarily driven by iron and steel prices.

The value of US residential construction spending, another indicator of the health of the construction market, has risen 7.6% year-to-date through June 2016 compared to the same period in 2015, but contracted 0.1 percent from May 2016.

If industry growth stagnates, many of the larger engineering and construction firms may consider acquisitions to expand their markets and service offerings.

Select public company metrics

Baker Tilly Capital reviewed publicly traded companies in the engineering and construction industry. The identified comparable public companies are trading in a wide range depending on many factors; EV/EBITDA ranging from 3.2x to 19.9x with a total engineering and construction industry mean of 8.4x. This compares consistently with the adjusted EV/EBITDA mean from the first quarter of 2006 (Q1-2006) to Q2-2016. During this period the EV/EBITDA ranged from to 5.4x (Q4-2008) to 12.6x (Q3-2007). Before the housing market declined in 2008, construction and engineering industry companies were trading at an all-time high. Soon after the housing market declined, construction and engineering companies were trading at an all-time low. Construction and engineering companies have recovered since the recession and have traded at an EV/EBITDA mean of 8.2x since 2010.

Public company valuations for engineering and construction firms can also vary considerably depending on the specific service and/or end market the company covers. For example, many of the lower valued specialty firms have significant exposure to the energy infrastructure industry, such as Chicago Bridge & Iron Company NV (4.9x EV/EBITDA), Goldfield Corporation (4.3x), Matrix Service Company (5.0x), McDermott International Inc. (4.3x), and North American Energy Partners Inc. (3.2x).

Sources: US Census Bureau, FirstResearch, Dodge Data & Analytics 2016 Construction Outlook, Thomson Reuters, Engineering News Record, Associated Builders and Contractors, Inc., Capital IQ

Select comparable public company analysis >

Average Historical Trading Multiples >

Select 2016 and 2015 transactions

The selected transactions with numerical data below are companies in the construction and engineering industry that occurred during 2015 and 2016 year-to-date. The market has seen constant acquisition activity, but publicly available valuation details are limited. During 2016, Stantec Inc. (“Stantec”), a large Canadian company, acquired MWH Global, Inc. (“MWH”). MWH is a large Colorado-based global engineering, consulting, and construction management firm focused on water and natural resources projects worldwide.

Comparable transactions with numerical data ($ in millions) >

Other select closed transactions 1/1/2016 – 6/30/2016 >

Sources: Capital IQ, public news sources and Baker Tilly Capital LLC research

Number and Aggregate Implied Enterprise Value of E&C Deals with Reported Values (where EV < $1 billion) – United States & Canada >

View the full Engineering and construction M&A update

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