Infrastructure Bill Will Add Fuel to Recovering M&A Market

By Mark Williams, Datasite Chief Revenue Officer, Americas The $1 trillion in funding is the beginning of a boon for industries around transportation, buildings, and electricity.

New money for infrastructure always perks up M&A in related industries, and this time is no different, despite some unique challenges.

The $1 trillion bills passed last week by the US Senate provide sizable chunks of funding to a wide range of infrastructure sectors, from broadband to electric vehicles to drinking water. It will provide a much-needed boost to many industries, perhaps none as much as engineering and construction (E&C). With $40 billion for bridge repair and replacement, $55 billion for water infrastructure, $73 billion for electric grid resilience and transmission, and more for public transit, ports, and power, industry players will be orienting strategies around competing for these projects.

In the short term, expect M&A to pick up in E&C, a fragmented industry that was heavily affected by the COVID-19 pandemic. This year, the sector grabbed back most of the growth lost during the initial months of the pandemic, even outpacing 2020 in some areas. Large acquirers are already snapping up targets and the infra bill could heat up activity even more as existing consolidators compete to add scale, technology, and capabilities.

The activity should continue down to smaller companies, as well. While construction giants fill gaps in their geographic coverage, midsize companies will solidify a dominant position by acquiring competitors, and small companies merge to gain scale and jump into a size range to bid for infra projects.

Activity up 73% YoY

Data site is already seeing some of this activity with global new industrial, transportation, and defense projects on its platform up 73% YoY in the first seven months of 2021, compared to the same period last year.

This year’s M&A climate has been spurred by pandemic recovery, low-interest rates, and free-flowing capital. Infrastructure has already played an important role in some of this year’s biggest deals.

The new funding should also embolden materials suppliers to do strategic deals like this one announced in June between an aggregates producer and supplier. The deal is expected to increase the combination’s footprint in urban areas – a sure winner in any build-heavy environment.

The Biden administration is showing support for green energy with funding for electric grid build-out and clean energy, as well as modernization of water infrastructure. Private equity roll-ups, SPACs, and emerging public companies will all play a role in consolidating innovative technologies boosted by the bill. PE firms and SPACs are actively searching for targets - and time is running out for some high-profile SPACs to make a deal or return investors’ money.

Emerging technologies in telecom, green energy, or smart grid could catch these players’ eyes. Gallium nitride (GaN) semiconductor technologies have grabbed some attention recently, for example, and are one example of a once-obscure technology that could revolutionize renewable energy with smaller, more efficient power supply solutions for electric vehicles and other electronics.

Infrastructure market challenges

The infra market has its challenges. Some, like the locked-up labor market, materials cost inflation, and supply chain interruptions could also drive deals in the face of the new funding. On the other hand, E&C companies relying heavily on retail, hospitality, or travel will experience volatility and continuing pandemic response disruptions and may hold off on deals. Public-private partnerships have proven difficult to accomplish in the US, and it remains to be seen whether the bill will ease the way for PPPs.

Another challenge lies in the scope and the spread of funding. President Biden has said he wants this bill tied to a second, larger bill, for a total of USD 3.5tn. With that package, the administration is broadening an ever-widening definition of infrastructure to include healthcare, economic incentives for families, and education spending.

While not surprising for a bill penned in a pandemic year, the broad focus could be dilutive. The combined package - still subject to change - provides more funding for community health care than for electric vehicles, roads, and bridges, and clean energy combined.  Affordable housing would also be a top priority for the combined bill.

Nevertheless, the pure dollar amounts for the traditional infrastructure categories are significant. That alone will drive deals in the coming years because reliable funding gives players the most important fuel of all: confidence.