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Engineering and construction deals insights: 2021 outlook

E&C deals activity recovers slower than other sectors

E&C deal volume and average deal value increased in Q3 but continued to lag behind the overall US deals activity, which had recovered to pre-COVID-19 levels. Macro headwinds in oil & gas and commercial real estate -- impacted by the uncertainty surrounding the second wave of COVID-19 cases -- are likely to overshadow the potential bright spots in infrastructure and residential construction. The overall sector is poised to contract in 2020 with recovery expected by 2022.   

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Challenges and opportunities for deals in 2021

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.  Explore national deals trends.

Engineering and construction deals outlook

While construction activities have, for the most part, been allowed to carry on, an anticipated second wave of lockdowns is likely to slow the recovery of the E&C sector deal volume.

Low interest rates and government support for increasing investment in infrastructure could lead to an accelerated recovery of the infrastructure segment. In addition, technology driven innovations, increased margin pressures, and the changes in lifestyle and work -style preferences of workers globally will likely fuel M&A opportunities in certain construction segments. 

“The ability to make investments in technology driven innovations to take advantage of changing market dynamics will be a critical factor in determining the winners and losers during the recovery and beyond.”

- Eric Cullers, US Engineering and Construction Deals Leader

Key deal drivers

New ways of being

Significant numbers of city-dwellers have fled to the suburban and rural areas, and this exodus could stall or reverse America’s urbanization trend. According to a recent survey of U.S. urban dwellers, approximately 40% said the COVID-19 crisis has prompted them to consider leaving to a less population-dense crowded area. The pandemic also continues to drive new ways of working remotely, causing management teams to re-evaluate office and real estate portfolios, with many companies looking to reduce office space. As a result of these lifestyle and working style trends, residential construction may see an increase in demand, while commercial construction demand will likely contract which will impact M&A activity within both of these segments.

Opportunities in innovation

As the industry continues to shift towards fixed-price contracts and the cost of skilled labor grows, construction companies will likely face increased pressure to manage costs. In order to preserve operating margins, construction companies will likely need to invest heavily in cost-improvement initiatives and leverage new technologies including automation, robots, drones and digital design. In addition, construction materials companies providing lower cost, high-quality products may see greater demand. As a result,  M&A activity focusing on technology will likely increase, and certain construction materials companies may be poised to capture market share from competitors.

Future of capital

The Federal Reserve is expected to keep interest rates close to zero percent in the foreseeable future to continue supporting the economic recovery. Continued lower rates and an historical level of capital available for investment will likely drive a continued recovery in deal volume, as stronger companies will be better positioned to make investments. Historical data indicate that investments made during downturns typically generate outsized returns and could ultimately provide better shareholder returns compared to competitors that delayed or reduced investments.

Infrastructure investment

As the V-shape recovery remains elusive and unemployment rates remain high, government stimulus in the form of infrastructure investment becomes more likely. Critical infrastructure markets such as transportation, water and sewage and telecom could be the largest beneficiaries of the increased investment depending on the form of future government stimulus packages. However, timing and magnitude of any government funded investments remains uncertain which will likely impact the profile of the overall market recovery.

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Eric Cullers

Engineering and Construction Deals Leader, PwC US

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Michael Sobolewski

Partner, Trust Solutions, PwC US

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