M&A in the Infrastructure Services Sector

Dato

The UK infrastructure services sector is set for a period of strong growth as a result of increasing investment from both the public and private sectors. This, combined with strong strategic rationale for large corporates to make acquisitions and increasing M&A activity within the sector, means that now is an opportune time to consider selling your business.

The sector encompasses a diverse range of businesses providing construction, installation, inspection and maintenance services to the UK’s transport, power, utilities and communication networks.

The UK market for providers of infrastructure services has been reasonably resilient to the prevailing economic conditions over recent years. This was driven by the high requirement to maintain the nation’s current infrastructure during the recession, when austerity related cuts resulted in the underfunding of both new infrastructure development and large-scale replacement projects. Further resilience can also be partially attributed to a level of protectionism within UK infrastructure with political desires for the majority of spending on ancillary services to remain within the UK supply chain.

Whilst some resilience was seen at an operating level, the volume of M&A activity for infrastructure services businesses remained low. This lack of investment by large corporates was as a result of the adverse macro-economic environment and general uncertainty about future government plans for infrastructure spending.

As a result of this, there remains a large UK supply chain for the provision of infrastructure services, with a high reliance on sub-contracting by the largest providers. This lack of integration has limited the opportunities for businesses to collaborate and share knowledge, creating constraints on the levels of innovation that could be gained by the large corporate players who fulfil infrastructure projects.

There is now general consensus across all stakeholders, political parties and the private sector that significant future investment is required in the development, regeneration and enhancement of UK infrastructure in order to maintain the UK’s attractiveness for investment, enhance its competitiveness and provide a foundation for continued economic growth.

This consensus has led to major announcements for future infrastructure spend, with the government recently announcing the commencement of £36bn of infrastructure investment, encompassing over 200 projects across a diverse variety of sectors. This investment is further buoyed by renewed private sector interest in infrastructure investment, from sources both domestic – such as the recent announcement of six major insurers that they will invest £25bn in UK infrastructure over the next 5 years – and international, in particular commitments from Chinese investors. This has been evidenced by transactions such as China Investment Corp, a Chinese sovereign wealth fund, acquiring a 9% stake in Thames Water Ltd for around £500m in 2012 and the involvement of Industrial & Commercial Bank of China (ICBC) and Beijing Construction & Engineering Group Ltd (BCEG) in the Airport City project at Manchester Airport. This investment is being coupled with significant improvements to the government’s procurement processes, enabling the sharing of more detailed forward forecasts with its contractors. At Clearwater International, we believe that this combination of increased demand and improved visibility is likely to provide corporate acquirers with the confidence they require to begin to invest in acquisitions, particularly within their verticals. In addition, the need to have a presence in the UK will encourage overseas players to view M&A as the easiest way in to the UK infrastructure market, acquiring technical qualifications, framework access and market and customer knowledge quickly and effectively.

With this renewed confidence corporates are seeking infrastructure businesses to help them fulfil a number of strategic objectives:

  • Acquiring market share in sectors where infrastructure investment is being focused;
  • Bolt-on acquisitions to explore new sectors or stages of construction, enabling them to provide full turnkey solutions;
  • Creating cost savings through vertical integration, in order to weather downward cost pressure from governments on their own margins; and
  • Sharing intellectual property, technical knowhow and best practice.

Mid- to long-term contracts for providers of wider infrastructure services, such as maintenance and inspection services, also result in a level of recurring revenue visibility that increases their attractiveness to purchasers. This leads to greater attractiveness for the fully integrated businesses offering turnkey services, over those that are reliant on the winning of one-off construction projects to maintain earnings.

The effect of this increased confidence and strategic rationale has resulted in a steady increase of transactions within the infrastructure services space.

These have ranged from large transformational deals, such as May Gurney Integrated Services plc’s acquisition by Kier plc and Ferrovial’s £385m acquisition of Enterprise Group Holdings to smaller tactical bolt-on acquisitions such as the acquisition of Clarke Telecom by Renew Holdings plc.