Business Services sector comment – Engineering consultancies – May 2017

In a further sign of consolidation in the engineering consultancy market, global conglomerate SNC-Lavalin has made a €2.4bn bid for British consultancy WS Atkins plc. The announcement comes less than a month since John Wood Group bought AMEC Foster Wheeler for €2.5bn and follows a string of mega-mergers in the sector.

The deal brings together two highly complementary businesses that will realise immediate margin improvements and expand SNC-Lavalin’s geographic footprint, with Atkins generating more than half of its revenues in the UK and Europe as opposed to SNC-Lavalin which is more focused on Canada and the US. Furthermore, the deal will help reduce SNC-Lavalin’s exposure to the more volatile oil and gas market, a strategic priority for the group particularly given the purchase of oil and gas services provider Kentz Corporation in 2014.

The timing of the deal is opportune for SNC-Lavalin who is looking to take advantage of a favourable exchange rate as well as Atkins stagnant share price, which has lagged behind its peers due to difficulties in its energy division and the Middle East.

Also announced in May, Japanese headquartered CTI Engineering acquired multi-disciplinary consultancy Waterman Group plc for €54m. CTI is the third largest engineering consultancy in Japan with specialist expertise in dams, bridges and roads. The deal will be transformational for CTI, which currently only generates 8% of its revenue outside of Japan and has no presence in Europe.

The two deals are yet further examples of overseas acquirers targeting UK consultancies, as buyers look to cash in on low relative valuations, the ability to deliver an end-to-end solutions and the positive sector dynamics in the UK, with a pipeline of major infrastructure projects. Other UK-listed peers to have been acquired include that of Hyder Consulting which was purchased by Arcadis after trumping Nippon Koei’s offer; WSP Group plc which was bought by Genivar Inc.; and finally Scott Wilson which was acquired by US-headquartered URS Corporation.

There is no doubt that with such high levels of consolidation in the market, global players will dominate. A key focus will continue to be on successful integration, particularly given the people-centric nature of the businesses, but also on driving further cost reductions which in turn will lead to highly aggressive pricing strategies. Whilst M&A will continue to fulfil a core function of a consolidator’s growth strategy, a lack of sizeable and unlockable targets is likely to prohibit a flurry of further mega deals. Medium-sized players who are able to demonstrate proven delivery capabilities in niche specialisms are therefore likely to become attractive targets.