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Engineering and construction: Deals 2022 outlook

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What's driving deals in 2022

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.

Engineering and construction deal volume surpasses pre-pandemic levels

Favorable capital market trends fueled by the Federal Reserve’s pandemic-era bond-buying programs and low cost of capital helped boost engineering and construction (E&C) sector deal volume in the first nine months of fiscal year 2021.

M&A volume exceeded pre-pandemic levels by 14% across all E&C segments. While overall deal value rose in fiscal 2021, the average deal size decreased compared to fiscal 2020, primarily due to fewer megadeals.

While the increase in 2021 deal volume compared to pre-pandemic levels was consistent across segments, private equity transactions in North America experienced higher growth relative to other regions. 

Engineering and construction deals outlook

The E&C sector is well-positioned for strong activity in 2022 despite the continued impact on margins by global supply-chain disruptions, rising material input costs and labor shortages.

The Infrastructure Investment and Jobs Act is expected to propel deal activity in the nonresidential market segment, with a particular emphasis on digital technologies. This is in addition to a shifting landscape requiring companies to deploy capital on investments that optimize operational efficiencies, deliver cost savings and enhance capabilities in green construction.

The residential construction segment’s recent performance is expected to continue over the short- to medium-term along with historically low interest rates. The Federal Reserve’s decision to scale back and end the pandemic-driven stimulus program by mid-2022 could likely mute growth in the longer term.

Key deal drivers

Optimizing portfolios

Given high valuation multiples, companies are strategically reviewing end-market exposures and realigning portfolios. This is resulting in focused divestitures and the spinning off of non-core assets in underperforming segments, initiatives which are expected to generate cash that can be allocated to new and existing growth areas.

Rising costs and inflation will likely continue to drive investments in construction technology categories as companies seek opportunities to drive efficiencies and widen margins. The recently passed infrastructure bill is expected to drive nontraditional M&A approaches such as public-private partnership ventures and strategic alliances with emerging technology vendors.

Committing capital to growth

Underutilized private equity funds and strong corporate balance sheets suggest substantial surplus capital available for deals. However, current demand-driven competition and high-valuation dynamics are expected to shift activity growth to adjacent sectors with investments in digital and connected construction capabilities.

The recently approved Infrastructure Investment and Jobs Act, which will contribute an additional $550 billion in federal infrastructure investments in roads, bridges, rail, water, mass transit and water transport infrastructure projects over five years, is expected to accelerate transactions in the nonresidential segment. While roads, bridges and water are budgeted to get the biggest boost in spending, mass transit and water transport will experience the largest percentage increase in allocated spending.

Despite inflationary pressures, a favorable interest rate outlook over the short- to medium-term coupled with urban supply shortages and pandemic-driven de-urbanization should bode well for continued strength in the residential segment over this period, although growth is anticipated at lower rates.

Unlocking value

Companies in the E&C sector are increasingly measuring transaction value through a sustainability lens, considering factors beyond typical diligence, valuation and integration metrics. With environmental, social and governance (ESG) becoming an increasing demand driver for  winning projects, companies are focusing on acquisitions that create associated competitive advantages in the marketplace. The industry is expected to continue investing in opportunities that support initiatives such as offsite construction, self-sufficient buildings and smart cities, carbon capture and storage technologies, and sustainable and responsibly sourced raw materials.

Increasing resilience

A number of factors are driving up input costs, eroding margins and impacting project timelines across the sector. The persistence of global supply-chain disruptions and sourcing challenges is expected to result in continued shortages in key construction materials and affect project profitability. Furthermore, pervasive labor shortages and increased competition for talent are also complicating the economic recovery as a surge in job openings has upended the labor market. Employees are quitting jobs in record numbers, indicative of current market imbalances. E&C companies’ ability to be resilient and navigate these headwinds will likely impact deal valuations.

“Despite sustained commodity and labor cost pressures, tailwinds from the Infrastructure Investment and Jobs Act, readily available capital from corporations and private equity funds and the focus on ESG capabilities or “green” construction are expected to drive continued strong deal activity within the engineering and construction sector.”

— Danny Bitar, US Engineering and Construction Deals Leader

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Danny Bitar

Engineering and Construction Deals Leader, PwC US

Michael Sobolewski

Engineering and Construction Industry Leader, PwC US

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