Aug 23, 2021

HVACR Equipment – August 2021

HVACR Equipment M&A Follows Demand for Energy Efficiency

M&A activity is expected to remain strong for niche technology providers of energy efficient HVACR equipment.

Ted PolkManaging Director, Capstone Partners

Our headline message is that merger and acquisition (M&A) activity in the HVACR Equipment industry has surged year-to-date (YTD) and is expected to continue. With 102 deals announced or closed as of August 10th, prior year levels in 2020 and 2019 were bested by 96.2% and 92.5%, respectively. Capstone forecasts that industry consolidation still has legs and expects that heightened deal activity will be witnessed over the near term. We believe the increased transactional activity reflects increases in demand for heating, ventilation, air conditioning, and refrigeration (HVACR) retrofits and upgrades that is largely being driven by the availability of cost-saving efficiencies, public sentiment that favors improved air quality, and expectations of support from government programs.

At a macro level, the opportunity for HVAC equipment manufacturers speaks directly to concerns that are being addressed by climatologists throughout the globe. Among others, an August United Nations' (UN) report found that hot extremes have become more frequent and intense since the 1950s and that humans are responsible for an estimated global surface temperature increase of approximately 1.93 degrees Fahrenheit.1 Due to increasing concerns regarding the environmental impact of human activity, governments are getting more proactive in finding solutions to help to combat these changes. For instance, the U.S. government has started a phaseout of ozone depleting substances such as hydrochlorofluorocarbons (HCFCs), and is expected to fully prohibit their use in HVAC and refrigeration systems by 2030, according to IBIS World.2  HVAC equipment providers that successfully develop and manufacture equipment that does not require chemicals like HCFCs stand to significantly benefit, capturing material portions of this elevated demand. This trend is expected to be exacerbated by consumers continuing to demonstrate a preference for sustainable systems and government initiatives continuing to seek to address the widespread climate concerns. In addition, as the economy continues to recover, Capstone expects the rising levels of disposable income and corporate profit to further augment upgrade-and-replacement activity.

Strategics Lead M&A, Private Equity Pursues Specialized Energy Efficient Markets

Strategic buyers have comprised the majority of M&A activity in the HVACR Equipment industry thus far in 2021, accounting for 73.5% of deals through August 10th.  Private and public companies have looked to enhance market share through inorganic growth, expand product portfolios, and improve equipment efficiency to better serve commercial and residential clients.

The Heating and Air Conditioning Equipment Manufacturing industry is fairly concentrated with the top four companies, Trane Technologies (NYSE:TT), Carrier Global Corporation (NYSE:CARR),  Johnson Controls (NYSE:JCI), and Lennox International (NYSE:LII), expected to account for more than 50% of industry revenue in 2021. However, this concentration masks the quantity of smaller niche-oriented players, and they continue to present compelling consolidation opportunities for PE firms and PE-backed companies. PE firms have demonstrated a particular appetite for niche manufacturers offering differentiated, energy efficient solutions. This is exemplified by private equity firm Arcline Investment Management's July acquisition of Dwyer Instruments, a manufacturer of controls for building automation and HVAC industries. Dwyer Instruments offers a wide range of instrumentation solutions with 93 active and pending patents, according to a press release.3 The company currently serves over 20,000 active original equipment manufacturers (OEMs) globally. Arcline indicated that Dwyer Instruments' differentiated product offerings position the company to benefit from the industry's trend towards automation, connectivity, and improved air quality and energy efficiency.

It is worth noting that these trends are also impacting major service providers, as they are also seeking to benefit from the increased interest in energy efficiency. Of note, in July, Reedy Industries, a leading provider of commercial HVAC services and building controls, acquired CS3, a mechanical, HVAC, and building controls solutions provider. Through the transaction, Reedy industries has established a strong presence in the Southeastern U.S. and expanded its range of connected building solutions.

Government-Based Industry Standards Incentivize Efficient Equipment Production

As consumers shift preferences towards sustainable and less-costly systems, manufacturers with higher efficiency ratings are expected to capture a larger share of demand. System efficiency is primarily calculated using Seasonal Energy Efficiency Ratio (SEER), a ratio of the total cooling capacity during normal periods of operation divided by the total electric energy input during the same period. Higher SEER ratings are awarded to more efficient equipment, with modern air conditioning and air-source heat pump systems ranging from 13 to 24 SEER. In 2015, the U.S. Department of Energy set regional standards, increasing its minimum rating for split-system heat pumps to 14 SEER, according to the Department of Energy.4 Consumers that have purchased HVAC equipment with a SEER rating above the new standard are eligible to receive tax credits of 30% of the cost, or up to $1,500, increasing demand for green systems. Consumers that purchase equipment with a higher SEER rating also benefit from substantial electricity cost reduction.

In addition to improving systems to receive a higher SEER rating, Capstone expects HVACR equipment manufacturers to continue to develop sustainable systems in order to help building owners pursue Leadership in Energy and Environmental Design (LEED) certification. While obtaining LEED certification is costly and requires significant planning, the accreditation demonstrates a commitment to sustainability and is so highly valued that developers are often able to charge tenants higher rents when a building is LEED certified, according to Facilities Net.5 Because HVAC systems comprise a substantial portion of a building's energy use, equipment selection is crucial to a building owner's pursuit of LEED certification. At the very least, LEED-certified designs evidence a building owner's embrace of green initiatives.

HVACR Equipment Manufacturers Improve Efficiency by Integrating Technology

Manufacturers in the HVACR market are investing significant resources into the development of tech-enabled equipment to reduce energy use amid heightened demand for efficient systems. In particular, industrial technology companies that have developed green building systems and smart technologies offering interconnectivity between equipment such as Johnson Controls (NYSE:JCI) and Schneider Electric (ENXTPA:SU) are well-positioned to capitalize on rising demand from building owners looking to benefit from potential government incentives, reduce their environmental footprint, cut energy costs, and achieve certification. "Federal policies and stimulus to incentivize investment in the renovation of existing infrastructure is growing. And regulations designed to reduce emissions are increasing. We see the investment required for commercial buildings to achieve net-zero extending into the hundreds of billions of dollars," said George Oliver, Chairman and CEO of Johnson Controls, in the company's Q2 earnings call.6 As government incentives for green equipment proliferate, industry participants offering efficient solutions are forecasted to benefit from rising demand.

In July 2020, Johnson Controls launched OpenBlue, a suite of connected solutions that enables building systems to work together and communicate utilizing artificial intelligence (AI) that combines data from both the inside and outside of the building. Under OpenBlue, Johnson Controls has received 90 U.S. patents for energy optimization innovations, according to its fiscal Q3 2021 earnings call.7 In July 2021, Johnson Controls deployed its Net Zero Buildings-as-a-Service platform under OpenBlue, utilizing Net Zero Adviser, a turnkey AI-driven tracking and reporting of sustainability metrics to help building owners reduce carbon emissions. The company has also utilized strategic partnerships to bolster OpenBlue's capabilities and enhance security solutions. This is exemplified by Johnson Control's partnership with DigiCert, a provider of an Internet of Things (IoT) Device Manager and automated digital certificate platform that encrypts user data and authenticates user identity for devices or services within a building. The partnership mitigates the risk of cybersecurity attacks which could result in costly operational interruptions.

In 2016, Schneider Electric launched EcoStruxureTM which provides energy management and automation solutions based on low carbon electrification. The platform utilizes EcoStruxure Automation Expert, the first software-defined automation system using IoT to create a direct connection between the software layer on smart and connected equipment. EcoStruxure Automation Expert delivers 40% engineering time reduction, 20% downtime reduction, and 10% production efficiency improvement, according to Schneider Electric's half-year earnings call.8 Schneider has expanded its service offerings through the EcoStruxureTM platform, delivering its solutions through six domains. EcoStruxure Building, Schneider's building system management domain, connects hardware, software, and services through an Ethernet Internet Protocol (IP) to help building owners maximize efficiency and building value, according to the company website.9

Leading public players are expected to continue to invest in the development of tech-enabled equipment to optimize energy use. While building system manufacturers that integrate connectivity in their products are expected to benefit from the sustainability megatrend, niche manufacturers producing sustainable solutions or equipment are also expected to capitalize on heightened demand. These smaller companies are forecasted to attract heightened buyer interest from strategics looking to enhance equipment offerings and PE firms aiming to capitalize on the digital transformation occurring in the HVACR Equipment and broader Building System industries.


  1. Intergovernmental Panel on Climate Change, "Climate Change 2021 The Physical Science Basis,", accessed August 13, 2021.
  2. IBISWorld, "Heating & Air Conditioning Equipment Manufacturing in the US", accessed August 13, 2021.
  3. Contracting Business, "Private Equity Firm Acquires Dwyer Instruments,", accessed August 16, 2021.
  4. U.S. Department of Energy, "Energy Efficiency & Renewable Energy,", August 13, 2021.
  5. Facilities Net, "LEED and HVAC: How to Balance Costs and Benefits,", accessed August 13, 2021.
  6. The Motley Fool, "Johnson Controls Inc (JCI) Q2 2021 Earnings Call Transcript,", accessed August 13, 2021.
  7. Seeking Alpha, "Johnson Controls International plc (JCI) CEO George Oliver on Q3 2021 Results - Earnings Call Transcript,", accessed August 16, 2021.
  8. Schneider Electric SE, "Half-Year Results,", accessed August 16, 2021.
  9. Schneider Electric, "Enable Smart Buildings with EcoStruxure Building,", accessed August 16, 2021.

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