After a sluggish start in 2012, merger and acquisition (M&A) activity in the industry continued to decline in the second quarter, primarily due to the continuation of the European sovereign debt crisis, the slowdown in the growth of the Chinese economy and overall uncertainty of the sector’s growth prospects. However, strong private equity fundraising in the first half of 2012 has resulted in the resurgence of financial investor activity in the sector.
The construction materials segment generated the greatest total value for the second quarter in a row with seven deals totalling US$2.36bn (£1.5bn). The USA was the most active individual country in deal making this quarter with eight deals totalling $2.8bn. The bulk of the US transactions were local and involved targets in construction machinery, partly as a result of the relatively strong growth in US manufacturing.
Transactions in the construction category led in terms of the number of deals and generated the second-largest total deal value. The construction subsector deal activity was driven by the growing infrastructure and urbanization needs of emerging markets, such as Latin America and Asia. Chilean and South Korean targets involved in the highway and street construction business generated the greatest volume of construction deals.
There was only one mega-deal of at least US$1bn announced in the second quarter of 2012. It involved the Abertis acquisition of OHL Brasil SA for a total consideration of US$1.824bn. OHL Brasil has been managing Abertis’ toll road assets in Brazil and Chile.
“Engineering and construction deal making remains tied to the overall condition of the global economy due to the highly cyclical nature of the sector,” said Kent Goetjen, US engineering and construction leader with PwC. “The fragile recovery of the industry and its heavy dependence on government spending, which is being curtailed in numerous countries, combined with the cautious global outlook, have all contributed to reduced M&A activity. On a positive note, there has been increased participation on the part of financial investors, who usually have shorter investment holding patterns than strategic players.”
In the second quarter of 2012, there were 34 deals with value greater than US$50m, totaling US$10.1bn, compared to 47 transactions worth US$14.7bn in the same period of 2011. Deal value and volume also declined sequentially from the first quarter of 2012, which saw 37 transactions totaling US$12bn, with the average deal value remaining flat during that time period at US$300m.
Despite the slowdown in engineering and construction deal making, financial investors continued to gain momentum, generating half of the transactions in the second quarter of 2012 – a level of participation that is higher than the average 10-year rate of about 33%. While all deals involving financial investors were local, they included both developed countries and emerging markets. The increased participation of financial investors may be due to both the rising number of PE firms and the greater availability of funds they managed to raise during the second quarter, says the report.
The majority of transactions in the second quarter of 2012 were generated by targets in Asia and Oceania as countries such as South Korea, Thailand, Taiwan and Australia increase activity in the M&A arena. Activity in the region was driven by the growing demand for infrastructure and urbanisation. The second quarter of 2012 also saw an increase in M&A activity from European acquirers who represented 11 deals worth US$4.97bn, compared to seven deals worth US$5.42 billion in the first quarter of 2012, as European companies continued on their path of consolidation, restructuring and divesting.
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