Industrial and Environmental Services M&A Update – December 2023

Defensibility of Service Demand Fuels Steady Industrial & Environmental Services M&A Activity

Capstone’s latest Industrial and Environmental Services (I&ES) Sector Update reports that aging U.S. infrastructure and the need for increasingly specialized manufacturing services has driven growth and demand for merger and acquisition (M&A) activity in the sector.

Government programs and funding have increased the demand for industrial and environmental services as the average age of infrastructure in the U.S. has begun to surpass its life expectancy. These initiatives have sought to redevelop and maintain critical structures to ensure societal safety and efficiency. The Infrastructure Investment and Jobs Act (IIJA) has allocated billions of dollars to the U.S. Department of the Interior’s (DOI’s) Bureau of Reclamation (BOR) for 2022 through 2026. Notably, water storage and dam safety have received the majority of infrastructure investments. Although infrastructure improvement has remained a longstanding issue, I&ES services have recently experienced elevated demand, with repairs having begun on thousands of miles of roads and bridges. Nuclear energy solutions have also seen greater interest amid heightened demand for cleaner, more efficient energy sources. Of note, nuclear reactor Plant Vogtle 3 was connected to power lines in July, contributing 1,000 megawatts of clean energy, while other developments have contributed to making significant strides in demonstrating nuclear designs. Further advancements such as high-assay low-enriched uranium (HALEU) production, are expected to support future nuclear reactor developments in the U.S.

Backlogs among sector participants have grown as an increasing number of infrastructure contracts have been awarded. The Infrastructure segment has led year-over-year (YOY) backlog growth, resulting in contractors expecting sales, profit margins, and staffing levels to expand over the next six months. SNC-Lavalin Group (TSX:ATRL), a leading global engineering services company, stated that generational investments in infrastructure by the U.S. have led to secured wins in transportation and building contracts while other public players have reported YOY revenue expansion, attributable to a robust project backlog and resilient M&A pipelines. Namely, Fluor (NYSE:FLR) reported a second straight quarter of 20% revenue growth YOY ($3.9 billion) with a project backlog of $25.5 billion, led by its Energy, Urban, and Mission Solutions segments.

I&ES M&A volume has kept pace with previous years as sector participants have sought bolt-on acquisitions to bolster product portfolios in an exceedingly specialized, highly capital-dependent sector. Private strategics and sponsors have commanded the bulk of deal activity to-date as defensible margins and the lack of cyclicality of many sector players has attracted private equity buyers to the space. The fragmentation of the I&ES sector has encouraged sponsors to deploy buy-and-build strategies targeting companies with equipment expertise, mission critical end markets exposure, favorable safety ratios with low accident rates, and robust profit margins. Less specialized players have received lower valuations but have still garnered significant buyer interest.

Also included in this report:

• Which government programs have aimed to redevelop and maintain critical structures, driving future activity in the I&ES sector.
• Which participants have sought acquisitions to bolster product portfolios in an exceedingly specialized, highly capital-dependent sector.
• How private equity firms have approached investments in the space.

Capstone Partners’ Industrials Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the industrial and manufacturing industries. Our team partners with leading mid-to-large sized industrials and manufacturing businesses that serve growing end-markets. We ultimately look to work with companies that manufacture highly engineered products and differentiated services with an entrenched competitive position.

For more information on the Industrials & Environmental Services Update featured in this report or to speak with one of our Industrials M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.