Mergers and acquisitions back in a big way

A number of construction materials mergers and acquisitions – big and small – took place in 2021, and more are likely on the horizon next year. FMI Capital Advisors’ George Reddin and Rob Mineo, who are regular contributors to the magazine, paid P&Q a special visit to discuss the current M&A landscape and the dynamics at play.

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Are you surprised by the sheer number of construction materials merger and acquisition transactions that occurred in 2021, especially considering how activity dipped in the first half of 2020 to extreme lows?

REDDIN: Let’s start at the beginning of 2020. Everybody was optimistic that the sector was going to have a big year in M&A. A lot of people were expecting infrastructure spending. And so the expectation was very, very high.

Of course, we’re all returning from ConExpo-Con/Agg about when the pandemic was really kicking in. All of that uncertainty around the sector caused buyers to pull back and, quite frankly, sellers [did] the same. If they were getting ready to go to market, they just pulled back because uncertainty kills transactions.

We actually expected the activity in the last 12 months or so after about four or so events took place.

We started with this concern: Are we going to be deemed an essential sector? We got past that pretty quickly. We had a couple of hiccups in Massachusetts and Pennsylvania, and we got passed that pretty quickly.

Then the question was: Were the DOTs (Departments of Transportation) going to have any money? We got past that at the end of June (2020) when most states, in essence, passed continuing resolutions of their budgets.

So now we’re essential, and [states] got the money. By late summer, the buyers were back and looking. So were the sellers.

The other pleasant surprise that not many saw was residential construction really picked up in response to the pandemic, the flight from urban to suburban, the need for larger homes to accommodate the at-home work and having kids out of school. Then, of course, the election brought great optimism for more infrastructure spending sooner.

So, I think we saw the frenzy that we have right now coming, and it was supported by the activity late in 2020 and [into] 2021.

MINEO: A lot of the buyers who control the space – the larger public companies –started to hold cash back during that period of uncertainty. They didn’t want to get in a position where they didn’t have cash on hand.

Then, when they made it through to the other side of a period of uncertainty, they needed to deploy that cash. They could either issue dividends, or they could go out and make acquisitions to help growth. Having a large swath of cash and the availability of that also helped push mergers and acquisitions forward.

Do you expect the current pace of M&A activity to carry into 2022, or are you expecting a slowdown? What factors or developments might encourage dealmaking to continue into 2022 at its current high level?

REDDIN: Right now, there’s a lot of activity with people trying to get deals done by the year’s end. Some of that was driven by concerns over tax changes. That’s going to flow over into next year.

As Rob said, there’s a significant amount of liquidity in the markets. There’s some share buyback programs going on. They want to deploy that capital. I think the momentum is kicking in.

In terms of what is encouraging that into next year: We all are expecting an infrastructure bill. In that, we’re going to have the highway program extended. We are all looking for residential to continue. Our forecasts are bullish over the next few years.

Interest rates, relatively speaking, remain low. [There’s] inflation. Even though it’s popped up here in the short term somewhat due to supply chain issues, it looks likely temporary.

Supply chain challenges will continue into 2022 but are going to start easing, hopefully. And labor constraints may ease as the stimulus spending winds down.

There’s some good momentum there. The buyers have the cash. They’ve got low debt ratios. They’ve got steady earnings – whether it’s from banks or through their potential stockholders – that are supporting growth. And their stock prices have been rewarded. They’re outperforming the S&P 500 and Dow Jones Industrial Average here in the trailing last 12 months.

The success of the sector is a function of public and private spending. All fronts look good right now. All of the fundamentals are there for this to continue.

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