After research from EY suggested this week that the top 15 UK construction companies by turnover could be consolidated into perhaps half that number within five years, a banker has told Construction Manager that a wave of finance looking for M&A deals in the sector could soon arrive from the US.
Market attention has largely been directed at possible acquiring companies from the Far East, such as the China Civil Engineering Construction Corporation, the China Investment Corporation (CIC), and Angbang Insurance.
But Phil McCreanor, head of UK M&A at global investment bank Lincoln International, argues that “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,” he said.
The EY research focuses on the top tier of major UK contractors, which it says account for around 60% of the sector’s turnover.
But while even the largest businesses in the sector struggle to return 2% margins, EY says that in the next five years a series of acquisitions could result in a much smaller group of firms achieving 5% margins.
This would also mean that the remaining contracting groups each have a turnover of at least £5bn.
EY director Tim Wainwright told Construction News that, in the coming years, firms would be split into those that pursue expansion through acquisition and those that position themselves as a potential takeover target.
Phil McCreanor: “UK stability”
“A number of players are exhibiting performance that is better than the sector average, which is pretty low,” Wainwright said. “That compels investors to pursue these deals and drive consolidation because it’s a route out of what’s been a difficult market.”
EY’s report was based on research undertaken with the majority of companies in today’s top 15.
EY also shares the majority opinion that Asian investors are most likely to seek to enter the UK market via acquisition, then creating a “domino” effect with other groups consolidating shortly afterwards.
Michel Driessen, a partner in EY’s transaction advisory team, told Construction News: “But we see a shift for the big players, where, in order to play on an international scale, you have to grow.”
But at Lincoln International, McCreanor describes a different M&A scenario. He argues that successful North American construction businesses are finding it difficult to expand in their home markets, and are seeking non-organic growth.
They also hope to capitalise on the strong dollar to pick up acquisitions at a relative discount.
In an article for Construction Manager, he argues: “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 that is desperate to build has positioned UK construction and property as the growth sectors for foreign investors.
“Furthermore, companies in the UK could be acquired at cheaper multiples 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.”
However, McCreanor believes that North American acquiring companies would have their eyes on companies below the elite tier discussed by EY.
“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 see a period of consolidation in that space,” he said.
Meanwhile, EY also said that the companies that will emerge as “winners” in a future round of M&A will be the ones that are diversifying exposure to different sectors, focusing on cash generation and costs rather than top-line profit, and limiting risk on lower-margin work.
Michel Driessen said that only companies that had embarked on these transformations would be positioning themselves for the future. “If you don’t do it now or haven’t done it yet, there’s a serious chance you will not be around anymore,” he said.
