Construction Services M&A Update – September 2022

Roofing Segment Contributes to Robust Construction Services M&A Activity

A resurgence in U.S. infrastructure investment, aging housing stock, and robust nonresidential building activity have fostered a healthy backdrop of demand in the Construction Services sector. The $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) marked a momentous federal backing of infrastructure improvement and has provided enhanced long-term revenue visibility to contractors and professional services companies. Many sector players anticipate meaningful impacts of the IIJA to begin to materialize later in 2022 and into 2023. Leading global provider of design, engineering, and construction services AECOM (NYSE:ACM) noted that project opportunities have accelerated on the heels of $114 billion of IIJA funding announced as available, according to its earnings call.¹ Notably, AECOM has seen opportunities in its pipeline increase by nearly 40% as its clients position themselves for this expected growth.

Heightened Appetite in the Roofing Segment Contributes to Robust Sector Consolidation

Existing home renovation demand has remained strong through year-to-date (YTD), although the Housing market has cooled in recent months, evidenced by the 8.1% year-over-year (YOY) decrease in housing starts in June, according to the U.S. Census Bureau.² Contractors specializing in high-value repair and replacement segments, such as Roofing, stand to recognize significant growth opportunities as homeowners continue to focus on home improvement. Nonresidential construction activity has persisted despite rising interest rates and labor scarcity, with total nonresidential building starts increasing 22% YOY through July, according to Dodge Data & Analytics.³ Manufacturing projects have continued to propel this segment as starts grew 79% in July from the previous month. Supply chain constraints and elevated costs will continue to present headwinds for sector players across the Construction Services landscape. However, healthy backlogs and ample expansion opportunities are expected to drive continued growth and merger and acquisition (M&A) activity through year end and into 2023.

Construction backlogs and demand for professional and contractor services have remained healthy despite economic turbulence. M&A volume in the Construction Services sector has shown no signs of slowing down, with strategic and private equity buyers actively pursuing high-quality target companies.

Darin GoodManaging Director, Capstone Partners

Construction Services M&A Volume Continues Strong Momentum from 2021

In a slowing overall M&A environment, the Construction Services sector has emerged as a clear performer through YTD 2022. Total announced or closed transactions amounted to 363, a 4% YOY increase from the record level of deal activity in 2021. Despite an uncertain economic outlook, strategic and private equity buyers have demonstrated conviction in the strong growth prospects for the sector. M&A valuations have remained at healthy levels through YTD, with the average EV/EBITDA multiple from 2018-present for professional services and contractor services businesses amounting to 9.5x and 7.0x, respectively.

Strategics have comprised a majority of M&A volume, accounting for 54.5% of total transactions. Enhancing scale, increasing geographic presence, and bolstering labor forces have been key motivations for strategic consolidation. Mastec (NYSE:MTZ), a leading infrastructure construction provider, agreed to acquire Infrastructure and Energy Alternatives (Nasdaq:IEA) for an enterprise value of $1.2 billion, equivalent to 6.5x EV/EBITDA (July 2022). IEA is a premier services provider in renewable energy and infrastructure solutions, offering engineering, procurement, and construction capabilities. The transaction highlights strategics’ focus on expanding service capabilities and customer bases, particularly in the Clean Energy & Infrastructure segment. The acquisition is expected to be accretive to Mastec’s 2023 adjusted earnings per share before synergy benefits, according to a press release.⁴

Private equity buyers have often approached the broader Building Products & Construction Services industry with caution but have comprised an increasing share of Construction Services sector transactions in recent years. Through YTD 2022, financial buyers have accounted for 45.5% of M&A volume—a significant increase from the five-year average (2017-2021) of 29.6% of annual transactions. Sponsors have often employed add-on acquisitions (37.2% of YTD transactions) to accelerate portfolio company growth and drive incremental returns upon exit. Private equity firms typically prefer noncyclical businesses with strong revenue visibility, particularly in an uncertain economic environment. While many view the Construction Services sector as inextricably tied to the health of the U.S. economy, sector M&A activity has proliferated amid clear recessionary signals. Sponsors have recognized the sector's growth potential and have increased their presence in the space. Privately-owned companies with strong management teams, healthy revenue growth, and EBITDA margins of over 10% are poised to garner robust financial buyer interest. Notably, high-growth segments such as Roofing have attracted significant investment appetite, a trend that is expected to continue in the near-term.

Roofing Market Poised for Sustained Growth

Aging housing inventory and rapid urbanization have been key growth drivers of the Roofing Contractor segment, a market that is expected to reach $56.1 billion in 2022, according to IBISWorld.⁵ Existing residential and nonresidential roofing projects comprise the bulk of the market, accounting for over 60% of revenue. A wave of roof renovations is expected over the next two decades as the median home age reaches 35 years and many asphalt shingles reach or exceed their life expectancy of 15-30 years, according to FEECO International.⁶ This provides significant tailwinds for the sector and reduces its reliance on new home construction activity. In addition, adverse weather, such as hail, offers ample revenue opportunities for roofing repair projects, particularly for roofing contractors approved by insurance providers.

Premier roofing product suppliers have experienced robust top-line growth which has fostered optimism for downstream residential and nonresidential project activity. Leading building materials manufacturer Owens Corning (NYSE:OC) experienced revenue growth of 16% YOY in Q2, with its Roofing business delivering record quarterly top and bottom-line performance, according to its earnings call.⁷ Sales in Owens' Roofing business increased 11% to $1.02 billion while maintaining a healthy EBITDA margin of 27%—unchanged from Q2 2021. Elevated demand in residential roofing has also driven revenue growth for Beacon Roofing Supply (Nasdaq:BECN) which experienced a 21.9% YOY sales increase in residential roofing products in Q2, according to its earnings release.⁸

Private Equity Firms Continue to Build Roofing Services Portfolios

Private equity firms have actively targeted roofing services providers through YTD 2022. The asset-light and scalable nature of companies in this segment make them a prime candidate for platform investments and buy-and-build strategies. Notably, Atlas Partners-backed Tecta America has established itself as a leading commercial roofing contractor and segment consolidator and has continued its active acquisition streak through YTD 2022 (more details below). Several notable private equity-led transactions are outlined below.

• Tecta America acquires Mahaney Group (August 2022, Undisclosed)

Tecta America has agreed to acquire Wichita, Kansas-based Mahaney Group, a provider of commercial new roofing and reroofing, commercial sheet metal, and other construction services for general contractors, property owners, and property managers. Terms of the transaction were not disclosed.

The transaction follows an exuberant period of M&A for Tecta America and marks its fourth acquisition in 2022. Atlas and Tecta have utilized inorganic growth to expand geographically and penetrate new, high-growth markets. Tecta America's 2022 acquisitions include the purchase of Washington, D.C. and Chesapeake, Virginia-based Katchmark Construction (June, undisclosed); Johnson Creek, Wisconsin-based Pioneer Roofing (May, undisclosed); and Deer Park, New York-based Douglas S. Plotke Jr. (January, undisclosed).

• New State Capital Partners acquires Patuxent Roofing & Contracting (April 2022, Undisclosed)

New State Capital Partners has acquired a majority stake in Patuxent Roofing & Contracting for an undisclosed sum. Laurel, Maryland-based Patuxent focuses on re-roofing services to hospitals, schools, government buildings, and other high-end facilities requiring operational specialization.

Patuxent's recurring revenue customer profile, proven stability through economic cycles, and abundant growth opportunities were key motivations for New State Capital's purchase of the business, according to a press release.⁹ New State also appears to be positioning Patuxent as a platform for further add-on acquisitions in the space. "Together with management, we intend to explore strategic acquisitions targeted at geographic expansion as well as complementary building maintenance, repair, and renovation services," commented Shaun Vasavada, Vice President at New State in the press release.

• Gauge Capital acquires Crest Exteriors and Apple Roofing (March 2022, Undisclosed)

Private equity firm Gauge Capital has acquired Crest Exteriors and Apple Roofing, which will be combined under the Apple Roofing brand. Terms of the transaction were not disclosed. Crest provides roof repair, replacement, and related services to residential and commercial customers in central and south-central U.S. Apple Roofing offers roof restoration for residential and commercial clients In Nebraska, Missouri, Iowa, and Arizona. Crest and Apple achieved $42 million and $35.1 million in revenue, respectively, in 2021, according to a press release.¹⁰

The establishment of the Apple Roofing brand, comprising Crest and Apple, was created by Gauge to provide capital solutions to roofing players seeking an ownership transition or partnership to accelerate growth. “This new company allows us to serve every type of roofing need: traditional repair/replacement and storm-related damage—all while also being the roofer-of-choice for property/casualty brokers and insurance carriers,” said Apple Roofing co-founder Dustan Biegler in the press release.

To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and Construction Services sector knowledge, please contact Managing Director Darin Good.

Endnotes

1. AECOM, "Q3 2022 Earnings Call," https://investors.aecom.com/, accessed September 1, 2022.

2. U.S. Census Bureau, "Monthly New Residential Construction, July 2022, https://www.census.gov/construction/nrc/pdf/newresconst.pdf, accessed September 1, 2022.

3. Dodge Data & Analytics, " Total Construction Starts Surge in July," https://www.construction.com/news/July-2022-Starts, accessed September 1, 2022.

4. Mastec, " MasTec to Acquire Infrastructure and Energy Alternatives, Inc. ("IEA"), a Premier Renewable Energy and Infrastructure Services Provider," https://www.mastec.com/press-release/2286/mastec-to-acquire-infrastructure-and-energy-alternatives-inc-iea-a-premier, accessed September 1, 2022.

5. IBISWorld, "Roofing Contractors In the US," https://www.ibisworld.com/, accessed September 1, 2022.

6. FEECO International, " A Look At How The US Residential Roofing Industry Is Driving Demand For Roofing Granules," https://feeco.com/a-look-at-how-the-us-residential-roofing-industry-is-driving-demand-for-roofing-granules/, accessed September 1, 2022.

7. Owens Corning, "FQ2 2022 Earnings Call Transcripts," https://s21.q4cdn.com/855213745/files/doc_financials/2022/q2/Owens-Corning,-Q2-2022-Earnings-Call,-Jul-27,-2022.pdf, accessed September 1, 2022.

8. Beacon, " Beacon Reports Second Quarter 2022 Results," https://ir.beaconroofingsupply.com/press-releases/press-releases-details/2022/Beacon-Reports-Second-Quarter-2022-Results/default.aspx, accessed September 1, 2022.

9. Cision, " NEW STATE CAPITAL ACQUIRES MAJORITY STAKE IN PATUXENT ROOFING & CONTRACTING," https://www.prnewswire.com/news-releases/new-state-capital-acquires-majority-stake-in-patuxent-roofing--contracting-301532748.html, accessed September 1, 2022.

10. Roofing Contractor, " Gauge Capital Acquires Two Roofing Companies to Create Apple Roofing," https://www.roofingcontractor.com/articles/96825-gauge-capital-acquires-two-roofing-companies-to-create-apple-roofing, accessed September 1, 2022.