Construction materials M&A back on the fast track

FMI put forth a cautiously optimistic outlook back in January for the 2021 construction materials industry.

Nine months into the year, we are thrilled to report that our predictions still seem to be on track, with positive attitudes looking toward the horizon. This sentiment can not only be seen in the combined stock performance of FMI’s Construction Materials Index (CMI), but in the surveys FMI uses to track market sentiment in various construction market sectors directly related to construction materials.

Big gains

The CMI has outperformed the Dow Jones Industrial Average and S&P 500 by about 23 percent and 15 percent, respectively, over the last 12 months. These dynamic results relate to both the banner performance of the major construction materials companies in the market, as well as the positive outlook for funding expectations going forward.

The Heavy Civil Construction Index and Nonresidential Construction Index have both returned to readings over 50, denoting expanding markets and robust backlogs. According to the U.S. Geological Survey, second-quarter aggregate production increased 7 percent year over year from 2020, while portland cement consumption increased 8 percent year over year for the same period.

Additionally, almost every public construction materials company reported earnings that either hit or exceeded analyst expectations in the second quarter (or, in the first half, for international-based firms).

Robust M&A market

While it is important to remember that construction is a “local” business, it is safe to say that the construction materials industry is experiencing a robust 2021 on a national scale.

As it often does, merger and acquisition activity for the construction materials sector has followed suit with the exceptional operational performance. FMI has tracked more than 60 announced construction materials acquisitions within the past 12 months, outpacing similar periods in recent history.

Not only is the market seeing a large number of transactions, but the construction materials industry is benefiting from all “types” of transactions (i.e., platform creation, bolt-on and major “thunderclap” deals). Specifically, Vulcan’s acquisition of U.S. Concrete and Martin Marietta’s acquisition of the Lehigh Hanson Western assets both made waves in national markets.

Inexpensive debt, large cash coffers for buyers and optimistic performance outlooks all continue to make M&A a popular topic for investors. The aforementioned drivers, coupled with the anticipated raise in capital gains tax, make M&A in vogue not only for the construction materials industry, but across all sectors.

According to The Wall Street Journal, year-to-date M&A activity through August totaled $1.8 trillion in the U.S. and $3.6 trillion globally – both of which are the highest year-to-date figures since 1995. Both are also on track to surpass record M&A activity set in 2015. 

Current M&A dynamics

While this is a “good problem to have,” it has produced some unexpected consequences. The M&A market is beginning to face similar bottlenecks that are being felt by operators in regard to supply and labor shortages. High demand for third-party transaction services is causing unexpected delays for deals.

The Federal Trade Commission, for example, said in August that it could not review all of its Hart-Scott Rodino filings, postponing many closing dates. Consider, too, that other ancillary services needed for M&A transactions – including quality of earnings analyses, surveys, environmental assessments and reserves analyses – are backlogged and causing weeks- and month-long delays.

The major driver for the forward-looking optimism in construction materials continues to be the promise of new federal funding. Both the predicted reauthorization of the federal highway bill and the idea of a one-time infrastructure stimulus package continue to be in focus for Washington despite the flow of news cycles.

The Senate has already passed a roughly $1 trillion infrastructure package with bipartisan support. As of press time, it was still up to the House to reconcile outstanding differences and move the funding proposal forward.

While no one can predict the future, sentiment dictates that a bill will pass that supports the construction materials industry, potentially launching the hot-mix asphalt, ready-mixed concrete and aggregate industries into “super cycles” not seen in decades.

As 2021 concludes, FMI expects a continued bull run for construction materials producers and operators. As industry operations go, so too will trends in the M&A space. It is certainly an exciting time for construction materials.

George Reddin and Rob Mineo are with FMI Capital Advisors Inc., FMI Corp.’s investment banking subsidiary. They specialize in mergers and acquisitions and financial advisory services.