A Small Bright Spot in Q3 M&A Activity for the Engineering & Construction Industry

25 October, 2019

Colin McIntyre
Engineering and Construction Deals Leader, PwC US

The number of M&A deals for engineering & construction (E&C) companies picked up during the third quarter of 2019, reversing a yearlong trend of quarterly declines and reflecting improving underlying sentiment of the opportunities in the sector. It’s not all rosy though as deal value continued the declining trend the sector has experienced, reaching the lowest quarterly level of the past three years. Overall, in the third quarter:

  • Total deal value declined by 29% from Q2 to $16.3 billion
  • Average deal size also decreased from Q2 by 29% to $75.1 million
  • The number of deals increased 8% from Q2 to 644 deals

The improvement in deal volume was a bright spot in an otherwise disappointing year for M&A within the sector. The headwinds of continued trade tensions and underlying worries about a potential economic slowdown continue to weigh heavily on the sector despite otherwise underlying favorable data that will likely continue to fuel opportunities for E&C services and, in turn, create significant revenue opportunity.

The J2 Acquisition purchase of APi Group for $2.3 billion was the largest deal of the quarter and third largest of the year, meaning the two megadeals from Infrastrutture Wireless and Wuhan Zhongnan Commercial Group from the first quarter remain the largest transactions YTD. A lack of megadeals, decline in deal value, and increase in deal volume all contributed to a decrease in average deal size.

When evaluating the subsectors, the Construction category remained the leader with 44% share of the deal value and Construction Materials Manufacturing followed with 29% share. In line with the broader sector trends, both categories saw a decline in deal value from the previous quarter. The Construction category also remained the leader in terms of deal volume with 40% share, a sizeable increase compared to Q2. The regional analysis shows Asia and Oceania continued to be the most active acquirer and target region for volume and value, with North America following in second.

Financial investors were active in the third quarter, accounting for $10.9 billion of the deals – a quarterly high since Q1 2018. Despite accounting for over two-thirds of deal value, strategic investors continued to drive the number of transactions taking place. This shows financial investors were interested in big ticket transactions, whereas strategic investors who registered growth in deal volume and saw a significant decline in deal value depicted their appetite for small ticket deals.

The fourth quarter is shaping up to be an interesting quarter with a number of geopolitical events coming to the forefront, which if settled, will likely help resolve some of the overhang that has held back M&A activity in the sector. While the increase in M&A deals is a leading indicator, until some of the overarching headwinds subside, M&A activity will likely be restrained for the balance of the year.