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Six trends driving construction industry dynamics


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August 1, 2013 by MICHAEL J. WALKER

With the landscape of the construction industry continuing to shift rapidly, understanding which direction the wind is blowing is critical for taking advantage of the changing dynamics.

The following six trends indicate where we think the industry is headed, and what we expect to see in terms of mergers and acquisitions in the coming years:

  • Canadian taxpayers will continue to focus on “value for money” in government spending and there will be increasing pressure to fund infrastructure. This will drive growth in procurement activity.
  • Advancing activity in P3s, together with project bundling across all construction sectors, will result in significantly larger public tenders, requiring bidders to be bigger in size and scope, and to have stronger balance sheets.
  • Surety/bonding capacity is migrating to larger contractors, reducing the overall allocation available to mid-sized and smaller firms at higher rates than in the past.
  • The impending rise in interest rates over the next three to five years will raise the cost of growth capital, negatively impacting valuation multiples for sellers and ultimately limiting credit availability for smaller and mid-sized contractors.
  • There will be a continued shortage of skilled construction industry workers and a growing migration of the most skilled people to larger firms that participate in bigger projects and offer a better (lower risk) employment profile.
  • The evolving age profile of owners of small and mid-sized construction firms, together with the increasing complexity and risks associated with smaller construction jobs, will continue to push owners to exit sooner rather than later.

As a result of these trends, larger firms will continue to consolidate as they seek more geographic coverage, platform diversification, “sector excellence,” and an experienced and skilled workforce.

Due to the limited number of companies financially capable of doing this and the potentially enormous number of sale opportunities, it is going to be a buyers’ market: Early sellers will provide buyers with the best strategic opportunities and get the best valuation multiples.

Additionally, trends indicate the construction industry will see more mergers and acquisitions from strategic buyers from Canada and beyond for three reasons:

  • Relatively attractive transaction multiples are still available for strategically positioned, geographically attractive or well-run private companies.
  • The positive attributes within Canada’s economy, including today’s low cost of capital environment, are giving domestic acquirers investment confidence and providing stability for larger offshore construction firms seeking a beachhead in Canada.  
  • The high degree of volatility in public capital markets means that strategic purchasers are better positioned to acquire than financial purchasers.

Michael J. Walker is a senior strategist and M&A Leader for the Construction Industry with MNP Corporate Finance in Toronto. Send comments to editor@on-sitemag.com



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