Sinead Cuthill is an associate and Dan Coppel is a partner at Faegre Drinker Biddle & Reath
Merger and acquisition activity in the UK construction sector has declined from its peak in 2022, frustrating would-be buyers and sellers, as well as the bankers, brokers, lawyers and accountants who service the market. The number of construction M&A deals in 2023 fell 10.6 per cent year on year and the trendline hasn’t recovered since then.
“Somewhat counterintuitively, there’s increased interest in modern methods of construction”
Undoubtedly, the problematic macro environment bears the blame for the lack of action. Debt finance has been harder to come by and became much more expensive than buyers were used to, driving private equity-backed sponsors out of the market.
This has left more space for strategic trade buyers, but stubborn levels of inflation and weakening customer and supplier credit profiles have all contributed to uncertainty in the prevailing business climate. That translates to a lack of confidence in M&A valuations.
There are buyers looking for bargains, but firms have not been sufficiently stressed that they needed to be rescued. This malaise has led to grumbles rather than calls for an ambulance. In short, it’s been all too easy to simply sit things out. M&A is cyclical and confidence always returns. But when? Now?
Macro factors suggest it should be. Inflation has moderated, interest rates have been trimmed and are predicted to continue to fall. Plus, there’s generally a loosening of credit, and we have a new government with a mandate for ambitious residential building targets and more schemes for first-time buyers. The Royal Institution of Chartered Surveyors’ UK Construction Monitor for the second quarter of this year reports a clear pick-up in activity. And the financial sponsors have record amounts of funds to deploy; if that isn’t invested, then their returns suffer.
There are also drivers fuelling sector consolidation, such as the Building Safety Act, implemented in the aftermath of the 2017 Grenfell Tower disaster. This enacts regulatory reform and widespread potential liability including throughout the whole construction supply chain. Consolidation is inevitable, and we see continuing interest in specialist fire-safety firms as a direct result. Similarly, environmental, social and governance-focused trade buyers like Holcim’s Aggregate Industries continue to focus on adding material suppliers with strong sustainability credentials.
Fizz of activity
So is M&A in construction back? It feels like it might be. As always, there are reasons for optimism. We’ve certainly seen an uptick in pre-deal conversations across all transaction sizes. At the top end, the much-maligned London stock market now offers value relative to the US market, certainly on price/earnings comparisons. Sterling remains historically weak and better UK growth prospects are attracting international trade buyers as well as financial investors. For US firms in London, this means we’re hosting more American clients ‘kicking tyres’.
Somewhat counterintuitively, there’s increased interest in modern methods of construction. The UK modular sector has been described as “challenging” for a variety of reasons. Insolvency or restructuring processes at several firms – most recently, Lighthouse and Modulous – might have sucked the air from the whole sector for several years to come. However, the pressure to address the UK’s burgeoning housing deficit (sustainably and affordably), together with potential support from Whitehall and more locally, have seen domestic and foreign investors re-running their funding models, and we’re working on several mandates in the sector.
For all market participants, opportunities are emerging and the pace of enquiries is quickening. The increasingly robust regulatory environment, together with the need to ensure that once a commercial deal is struck, execution risk is minimised and deals get papered quickly, all combine to mean that most construction M&A lawyers are now busy again with solid pipelines through to year end. A more stable macro environment will undoubtedly help maintain that, but as to whether or not the market will recover to its pandemic-era highs, there’s no crystal ball.
