Regulatory Environment Intensifies, Vitalizing M&A Activity in EHS Market
The Environmental Health & Safety (EHS) market has seen an uptick in demand throughout 2023, benefitting from increased outsourcing of occupational health and safety solutions and greater emphasis on sustainability initiatives. Public market players have reported strong top-line growth to-date as a result of the heightened demand. A leading EHS player, MSA Safety (NYSE:MSA) reported revenue growth of 17% year-over-year (YOY) in Q3, with balanced unit volume and price, according to its earnings transcript.1 Similarly, Intertek Group (LSE:ITRK) delivered steady revenue growth, rising 7.3%, citing strong performance in its Health and Safety division, according to an Intertek November trading update.2 Other public players such as Clean Harbors (NYSE:CLH) and Alpha Pro Tech (NYSE:APT) have seen its share prices appreciate 52.9% and 31.6%, respectively, through 2023 as healthy operating performances among EHS players have garnered optimism for continued sector growth in 2024, especially as the regulatory environment tightens.
Regulators have sought to institutionalize greater accountability, reporting, and transparency in workplace safety practices. The Occupational Safety and Health Administration (OSHA) reported in July that new laws targeting high-hazard industries will require all incident logs to be submitted electronically in a searchable database, with the intention of educating OSHA and the public on the safety and health problems facing workers. OSHA will use the subsequent data to intervene through strategic outreach and regulatory law enforcement to reduce worker injuries and illnesses, explained Doug Parker, Assistant Secretary of Labor for Occupational Health and Safety. With the final rule taking effect January 1, 2024, the insights are expected to guide workers and employers to make more informed decisions about their workplace’s safety and health, according to a U.S. Department of Labor July press release.3 With increased visibility into data, regulators and institutions will be able to pinpoint additional shortcomings, enhancing the potential demand for outsourced support.
EHS compliance permits the perforation of Environmental, Social, and Governance (ESG) standards into everyday practices. Sustainability, geopolitical, and macroeconomic pressures have incentivized businesses across all industries to conform to ESG standards. The U.S. has been slower than other developed nations to bring about legislation, leaving organizations to self-govern. The Securities and Exchange Commission (SEC) announced its proposal for sustainable disclosure regulations that would require certain climate-related reporting in financial statements that have a material impact on operations or financial conditions, according to a March 2022 press release.4 The SEC also has proposed requirements for companies to report information about climate-related risks, including disclosures regarding greenhouse gas emissions, according to the press release. The lack of standardization in ESG reporting is noteworthy, as businesses have developed their own styles and formats to make relevant disclosures, complicating potential audits. Businesses that integrate ESG frameworks and successful process systems will likely be viewed positively by large institutional investors.
Although the overall M&A market, the robust interest from acquirers and investors in EHS, and positive impact companies, including services, products, infrastructure, and technology, was sustained throughout 2023, companies with a differentiated product or service offering, or disruptive technology, generated strong valuations from both corporate and financial acquirors. Increasing regulations, dedicated impact and sustainability fund raising, and the Inflation Reduction Act will be key drivers towards continued M&A interest in this space.
Heightened Regulations Cultivate Continued EHS Market Interest from Strategics and Sponsors
The EHS market has seen an uptick in merger and acquisition (M&A) activity through 2023, with 164 transactions announced or completed, a slight 1.2% rise YOY. Private strategics have captured a larger share of total transactions (45.1%) through 2023 compared to 2022 (35.8%). Public strategic buyers have also seen their sector exposure rise 12.0%.
The lending environment has tightened, causing increased selectivity among private equity buyers. Notably, the average debt-to-EBITDA multiple paid by financial buyers for platform acquisitions fell to 3.5x in Q3 2023 from 3.7x in the prior year. However, private equity firms have maintained significant interest in the EHS market. Add-on acquisitions have accounted for 46 deals or 28.0% of transaction volume in 2023. Those with high revenue visibility, specialized products and services, and attractive end market exposure, have continued to garner roll-up interest from private equity.
M&A valuations in the EHS market have normalized from the record multiples seen in 2021, which amounted to an average of 5.9x EV/Revenue and 16.0x EV/EBITDA. In 2023, multiples averaged 1.7x EV/Revenue and 12.6x EV/EBITDA, an increase from the prior year average of 1.3x EV/Revenue and 12.2x EV/EBITDA.
Outsourcing Drives Services Segment M&A Activity
Continued regulatory oversight will likely force businesses to hire specialized, third-party manpower and compliance expertise, resulting in heightened demand for more qualified professionals. Developing this expertise in-house, particularly finding and cultivating this specialized workforce, has proven difficult for companies, with many players seeking outsourced, cost-effective help to remain compliant. Various end-markets such as Pharmaceuticals, Biotechnology, E-Commerce, and Construction have competed to meet compliance standards and ESG goals. This can lessen any fines and violations, provide cost saving synergies, and mitigate reputational risk with customers, stakeholders, and the public.
The Services segment has captured the majority (54.9%) of sector deal activity as deals for EHS equipment manufacturers have declined 20.1% YOY. Companies have leaned on outsourcing expertise in recruiting, training, and managing specialized workforces for capital projects. ALS Limited (ASX:ALS), a leading global technical services provider, has made six acquisitions in fiscal year H1 2024, with CEO Malcolm Deane noting megatrends such as the transition to clean energy, increased client outsourcing, heightened regulations and enforcement from authorities, and growing demand for sustainability-linked services, according to its recent earnings transcript.5 Additionally, Lakeland Industries (Nasdaq:LAKE), has adapted to the everchanging regulatory environment by implementing its SSQ—small, strategic, and quick acquisition strategy which identifies targets similar in size and are highly accretive to the short-term bottom line, according to its earnings transcript.6
M&A volume in the EHS Software market has grown 41.2% YOY in 2023, with 24 deals announced or completed compared to 17 deals in the prior year. With OSHA regulations requiring online incident tracking, coupled with the rise of artificial intelligence (AI), EHS providers have spotlighted software as necessary to track compliance and maximize safety. Of note, EcoOnline’s acquisition of Alcumus’ EHS Software business (January 2023, Undisclosed), demonstrates the adoption of software solutions by EHS players to comply to additional regulations. The deal is expected to create a truly global leader in EHS software-as-a-service (SaaS) solutions, one that creates safer and sustainable workplaces across Retail, Construction, and Manufacturing end markets, according to a press release.7
Consulting Services See Heightened Interest from EHS Market Participants
Environmental Health & Safety market participants have grappled with an increasingly complicated regulatory environment, driving heightened demand and buyer interest for consulting services businesses. Consulting services often offer cost-effective, targeted solutions catered to players in segment verticals. Outlined below are recent, notable consulting transactions in the space.
- Capstone Partners Advised HazTek LLC on Its Sale to Code Red Safety, a Portfolio Company of Warren Equity Partners (November 2023) - Based in Medford, New Jersey, HazTek is one of the nation’s largest independent “pure-play” providers of safety management services for facility capital projects. In addition to consulting services and safety training, HazTek provides on-site safety personnel for large-scale capital projects and ongoing maintenance. The company serves some of the world’s largest brands in high-growth end-markets such as pharmaceutical, datacenter, and e-commerce. HazTek employs a staff of over 300 employees, including 275+ full-time field professionals with various specialized certifications and experience levels—including several Certified Industrial Hygienist (CIH) specialists. For more information visit haztekinc.com.
“We chose Capstone due to their extensive track record of success and their experience in advising founder-owned businesses through the sales process. They took the time to fully understand our definition of a successful transaction and quickly presented numerous qualified buyers who met our criteria. They consistently acted in HazTek’s best interest, and we are very grateful to the Capstone team for being our advisory partner and helping us achieve the best possible outcome for us and our employees.”
- Bowman Consulting Group Acquires Blankinship & Associates (November 2023, Undisclosed) - Engineering services firm, Bowman Consulting Group (Nasdaq:BWMN) acquired Blankinship & Associates. Bowman has completed 12 acquisitions in 2023, and 27 acquisitions since its initial public offering in May 2021. The deal was funded by a combination of cash, seller’s notes, and equity, providing additional portfolio expansion of real estate, energy, infrastructure, and environmental management solutions expertise.
“Their reputation as a leading source of environmental sciences and engineering services was what originally drew us to Blankinship, but as we got to know them it was their professionalism and unrelenting can-do culture that compelled us to make them part of Bowman. Their practice will be of immediate value in every aspect of our business, and we expect there to be significant revenue synergy and wallet-share expansion opportunities created by this acquisition,” said Gary Bowen, Chairman and CEO of Bowen Consulting, in a press release.8
- GI Manager Acquires Atlas Technical Consultants (January 2023, $979.2 million) - Atlas Technical Consultants (Nasdaq:ATCX), a leading infrastructure and environmental solutions provider has been acquired by private investment firm GI Partners in an all-cash deal for an enterprise value of $979.2 million, valuing Atlas at 1.6x EV/Revenue and 13.9x EV/EBITDA. Atlas stockholders will receive $12.25 per share in cash for each share of Atlas common stock, a premium of approximately 124% over Atlas’ January 30, 2023, closing price. As a result, Atlas common stock has been delisted from the Nasdaq exchange.
“This transaction recognizes the value our team has created over the last five years. Our partnership with GI Partners represents a new and exciting chapter for our employees and our customers. We are aligned in delivering exceptional service and helping our clients design and complete infrastructure projects that improve their communities,” said L. Joe Boyer, Atlas’ CEO, in a press release.9
As additional regulations take effect in 2024 and businesses continue to seek outsourcing support to meet EHS standards, strategics and private equity buyers are likely to increase sector exposure. Equipment and Services EHS segments are expected to rebound through 2024, while the Software space is anticipated to experience continued growth, maintaining healthy transaction volumes.
To discuss the extensive shift in regulation compliance, provide an update on your business, or learn about Capstone's wide range of advisory services and EHS market knowledge, please contact us.
Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.
MSA Safety, “EDITED TRANSCRIPT MSA.N - Q3 2023 MSA Safety Inc Earnings Call,” https://investors.msasafety.com/static-files/ea8f37f8-972f-495e-8613-f0180e5f2f1f, accessed December 11, 2023.
Intertek, “Intertek 2023 November Trading Update,” https://www.intertek.com/news/2023/november-trading-update/, accessed January 11, 2023.
U.S. Department of Labor, “OSHA National News Release,” https://www.osha.gov/news/newsreleases/national/07172023, accessed November 27, 2023.
U.S. Securities and Exchange Commission, “SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors,” https://www.sec.gov/news/press-release/2022-46, accessed November 27, 2023.
MarketScreener, “ALS LIMITED,” https://www.marketscreener.com/quote/stock/ALS-LIMITED-11441934/news/Transcript-ALS-Limited-H1-2024-Earnings-Call-Nov-14-2023-45316466/, accessed November 11, 2023.
Lakeland, “Lakeland Industries Fiscal 2024 Second Quarter Financial Results,” https://www.webcaster4.com/Webcast/Page/2237/49005, accessed November 28, 2023.
PR Newswire, “EcoOnline acquires Alcumus' Environmental, Health & Safety software business,” https://www.prnewswire.com/news-releases/ecoonline-acquires-alcumus-environmental-health--safety-software-business-301727718.html, accessed November 27, 2023.
Bowman, “Bowman Enters into Definitive Purchase Agreement with California Environmental Firm Blankinship & Associates,” https://investors.bowman.com/news/news-details/2023/Bowman-Enters-into-Definitive-Purchase-Agreement-with-California-Environmental-Firm-Blankinship--Associates/default.aspx, accessed November 27, 2023.
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