Concern about trade conflicts hits merger activity


April 28, 2018 – There has been a drop in the value of mergers and acquisitions in the engineering and construction sector amid increased concerns about potential trade conflicts.

PwC’s ‘Q1 Engineering & Construction Deals Insights’ report gives a recap of recent merger activity in the industry and sets out what to expect by way of deal activity for the rest of this year. The study found that the E&C deal value in the first quarter came to a total of US$14.5bn (£10bn), down 57% from Q4 2017 and down 4% from Q1 2017.

Similarly, the volume of deals was down 17% compared to Q4 2017 and 16% from Q1 2017, with a total of 567 announced deals in the sector sector.

Cross-border deals contributed to most of the value in Q1 2018, though inbound activity from Asia dropped to its lowest levels in the last three years.

Setting aside the potential impact of the increased rhetoric around trade and tariffs, there continues to be strong housing and infrastructure investment and demands for upgrades globally. This make the sector attractive for investment, said PwC.

The report said that the beginning of 2018 can be marked by easing fiscal policy, tightening monetary policy and turbulent trade policy. While changes in fiscal and monetary policy do not pose an immediate risk to economic growth, recent trade disputes could disrupt industry supply chains and, in turn, impact global GDP.

Each of the trends is seen as having possible implications for M&A activity in the sector. Lower corporate taxes will provide industry players with the capital to pursue acquisitions, although it is uncertain whether this will lead to increased M&A activity, as the easing fiscal policy could also benefit prospective sellers. Meanwhile, increasing interest rates would make debt financing more expensive, decrease stock valuations, and give companies with higher liquidity a competitive advantage. On the trade side, PwC sees conflict arising in several regions of the world. Recent tariffs on steel and aluminium are signs of increasing tension between the US and China. In addition, ongoing discussions around NAFTA may have further implications on the North American market.

While some of the decline is seasonal with holidays, including Lunar New Year, increased concerns around potential trade conflicts appear to be weighing, said PwC’s US engineering and construction deals leader Colin McIntyre. “Of particular note is inbound activity from Asia in Q1 2018, which dropped to its lowest levels in the last three years. One quarter does not make the year, and we believe underlying sector fundamentals remain positive over the long term.”

M&A activity is off to a slow start in 2018, and down compared to Q4 2017 and Q1 2017. PwC said that potential favorable tailwinds created by tax reform on corporate cash flows have not yet unlocked any increase in M&A activity in the sector and appear to be muted by tariff announcements and the unknown impact they may have, particularly on cross-border investments.

The largest deal of the quarter was in March, when Italy’s Atlantia and Hochtief, ACS’s German arm, announced a joint bid for Abertis Infraestructuras, a Spanish toll-road operator. PwC said that the competing bids may result in an agreement to break up the company in a transaction worth US$3.1bn, where Atlantia would obtain the Italian, French and part of Latin American assets, and Hochtief would take the remaining Latin American and the Spanish markets.

Of particular note in Q1 2018, said PwC, was the decrease of inbound investment activity by China into North America which fell to its lowest level in the past three years. The impacts of potential trade disputes are likely to continue to play out in the coming months, with the fallout on M&A activity too hard to gauge. “One positive note on trade, at the time of this report there were positive comments by US vice president Mike Pence, expressing optimism about an agreement on NAFTA. Setting aside the potential impact of the increased rhetoric around trade and tariffs, the fundamentals in the sector remain positive, as there continues to be strong housing and infrastructure investment and upgrade demands globally which in turn make the sector attractive for investment.” said PwC.



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