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Engineering and construction: Deals 2022 midyear outlook

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Despite macroeconomic uncertainty, continued growth in deal activity fuels E&C sector optimism

The scorching pace of recent M&A activity has slowed slightly in 2022, primarily due to economic and geopolitical uncertainty. Deal activity is expected to remain stable in the near term. Capital availability along with private equity (PE) investors and strategic balance sheet strength are expected to drive this  continued investment.

Deal activity was consistent with pre-pandemic levels, despite deal volume declines in the last quarter. Volumes over the last four quarters ending in the first quarter of 2022 surpassed pre-pandemic levels by 18%. Deal values declined in the last two quarters due to fewer megadeals (deals of at least $1 billion in value), with companies increasingly cautious of complications arising in government approvals. 

Deal volume growth over the last four quarters was driven by North America activity across all engineering and construction (E&C) subsectors, with the exception of construction machinery. This region experienced a shift toward local, strategic investor deals — highlighting the impact of global economic headwinds. 

Engineering and construction deals outlook

The outlook for the E&C sector deal activity remains optimistic, driven by continued availability of capital and buoyed by the Infrastructure Investment and Jobs Act — despite headwinds from slowing economic activity, rising interest rates and cost pressure from rising material costs, increased competition for labor and ongoing supply chain issues.

The recent uptick in the residential market’s performance is expected to continue due to interest rates still low by historical standards, a housing gap due to underbuilding in the last decade, the millennial generation entering prime home-buying age and housing inventory near all-time lows.

The non-residential market segment is expected to grow, but the outlook is mixed by sector. Transport, manufacturing and education are expected to benefit from spending associated with the infrastructure bill, while construction spend related to offices and hotels is expected to contract, impacted by continued remote working and business travel trends post pandemic.

Key deal drivers

Return to capital discipline

Though private equity and corporate companies continue to have significant dry powder available for deal activities, competition for assets and a higher cost of capital will require more discipline. The Federal Reserve is responding to inflationary pressures driven by increasing wages and higher oil prices by reconsidering its monetary policy, bringing an end to its bond-buying program, signaling a series of interest rate increases and announcing that it will implement a policy of quantitative tightening, reducing its position in treasury and mortgage bonds.

The resulting rise in the cost of capital will require companies to apply a more highly focused lens to M&A activities. E&C companies’ ability to navigate these headwinds will likely lead to increasing differentiation in terms of deal valuations. 

Navigating uncertainty

From a macroeconomic standpoint, companies are not only dealing with the lingering effects of the COVID-19 pandemic and its continued impact on supply chains, but are also increasingly needing to negotiate financial markets volatility and geopolitical destabilization brought on by the war in Ukraine. 

In response to the geopolitical instability, E&C companies are expected to focus their investments and M&A activities more locally, particularly in the more stable North American and European markets. As the war in Ukraine shows no signs of slowing, spillover effects are expected to drive companies’ portfolio realignment considerations, with continued divestment in underperforming and non-core regions and reallocation of surplus cash into mature markets. 

Investments in purpose

Given inherent health and safety requirements, the labor-intensive nature of the industry and environmental impacts of its operations, the E&C industry has long included environmental, social and governance (ESG) topics on boardroom agendas. Increasing stakeholder engagement and regulatory reporting requirements are driving renewed focus on E&C companies’ ESG plans. 

Companies are expected to continue to seek and deploy capital in opportunities that support sustainability initiatives such as responsible sourcing, self-sufficiency and offsite construction and carbon neutral technologies. Furthermore, companies that demonstrate agility in integrating investments in ESG are expected to draw higher valuation multiples in the market.

Increasing resilience and security

The pandemic exposed the vulnerabilities of just-in-time global supply chains built for ultimate efficiency. Supply shortages for key construction materials continue to persist and disruptions are being worsened by backlog and congestion at major ports. Project delays resulting from these longer lead times and sharply increased material freight costs are directly impacting project margins. 

The pandemic also necessitated a new regime of safety standards and protocols. E&C companies were able to quickly adapt to these new requirements, although attracting workers continues to be an issue for the industry. Labor shortages are exacerbating project delays, with companies less able to pivot and meet the needs of their customers. The sector is also encountering difficulty in attracting qualified candidates, with the industry increasingly competing with technology companies for talent in new digitally focused roles. 

“E&C deal activity is expected to remain stable due to the Infrastructure Investment and Jobs Act, private equity and corporate dry powder, realignment of end market exposure and acquisition of new technologies to support operations, despite the impact from inflation, supply chain disruption, labor shortages and the war in Ukraine.”

— Danny Bitar, US Engineering and Construction Deals Leader

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Danny Bitar

Danny Bitar

Engineering and Construction Deals Leader, PwC US

Michelle Ritchie

Michelle Ritchie

Industrial Products Deals Leader, PwC US

Michael Sobolewski

Michael Sobolewski

Partner, Trust Solutions, PwC US

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