With favourable conditions inducing well-funded North American buyers to look beyond their domestic market, the next crop of purchasers of European assets could come from across the Atlantic, says Phil McCreanor, head of UK M&A at Lincoln International.
Phillip McCreanor
Asian interest in UK hard assets is clear with CCECC, China Investment Corporation (CIC), Angbang Insurance and many more looking to take advantage of the UK’s comparatively stable political and economic environment and favourable borrowing conditions.
Much of the foreign investment in the UK has come from the East and while this is expected to continue, the really big story is coming from the West.
At the start of August, US construction giant Masonite took over the UK construction materials specialist National Hickman. This deal, while not the biggest to hit the market, is part of a wider trend that is likely to become evident in the sector.
Whilst the mergers and acquisitions market is buoyant in the US, exceedingly favourable conditions in the UK have created a strong outlook for M&A within construction. The eyes of North American private equity and construction trade companies are firmly fixed on UK mid-cap targets.
For North American firms keen to grow through acquisitions, doing so domestically is proving difficult. The same is true for US private equity groups looking to expand their portfolios. Strong-performing companies that could only be acquired at high multiples in competitive auction environments has made the domestic construction M&A market more challenging, limiting non-organic growth opportunities.
While global markets are broadly improving, there are very few regions that offer the same stability that is now present in the UK economy. A business-friendly government, strong and sustained growth, low interest rates and a country desperate to build has mean UK construction and property are seen as growth sectors by foreign investors.
As a result, North American firms are now looking to grow abroad by using the strong dollar to acquire companies at a relative discount.
Furthermore, companies in the UK can be acquired relatively cheaply and have strong prospects given that much of their work is underpinned by various government initiatives, whether that is infrastructure spending or the focus on house building.
The construction sector is as strong as it has been for some time and has huge growth potential. This kind of strength, even among the smaller companies, does not go unnoticed abroad
Any industry relating to hard assets tends to move slower when it comes to market cycles and the same can certainly be said for construction, which has a significantly later cycle compared to the tech and consumer industries. The damage of the last downturn had a far greater effect on built environment sectors than most.
That damage lasted for a long time and the recovery has been slow but the UK construction sector is now likely to embark on a prolonged period of growth. At this early point in the cycle, the conditions are perfect for acquisitive private equity and trade companies to swoop into the UK and expand their reach.
This emerging trend is likely to be accentuated by the breadth of interest being shown by the North American buyer base. While Asian investors are far less likely to be involved in the supply chain, the National Hickman deal shows a willingness by American firms to become involved in all aspects of the UK built environment sector, from materials to contractors and developers. In this space, they can exploit strong market positions and leveraged technologies in the midst of a drastic materials and skills shortage.
Asian investors like CCECC, CIC and many others have broadly kept themselves within the boundaries of contractors and real estate. This has been demonstrated by CCECC with its strong reported interest in Balfour Beatty, alongside the many existing real estate investments by Asian sovereign wealth funds and other vehicles.
North American interest is likely to be most readily evident in mid-market companies that have a strong product and technology offering. These firms can further exploit their existing routes to market while also developing new routes through technology such as automated procurement. As a result, the industry is likely to undergo a period of consolidation in that space.
The construction sector is as strong as it has been for some time and has huge growth potential. This kind of strength, even among the smaller companies, does not go unnoticed abroad. The relatively difficult M&A conditions in America, political and economic stability in the UK and an extremely healthy construction industry will inevitably lead to significant M&A activity over the medium to long term. The Americans are here, they are strong and credible buyers and are looking to grow.
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