Slow Rebound: EC&M 2012 Top 50 Electrical Contractors

Buying local

In 2011, the firms on the Top 50 focused on their most active markets. Private markets, such as industrial, including manufacturing and power, and institutional, especially health care, experienced steady growth (Table 2). (For more on these market sectors, see “2012 U.S. Manufacturing Update” in the July 2012 issue of EC&M and “Health Care Market Construction Forecast in the August issue of EC&M.) However, 11 firms on the list wrote in data centers as one of the sources of the greatest dollar volume of projects their firm completed in 2011. The same markets are expected to dominate the industry this year, but some firms on the Top 50 list are forecasting a small return of public sectors (Table 3).

(Photo at right courtesy of Cupertino Electric, Inc.)

CEI’s biggest growth was predominantly centered in power generation for the electric utility market, including both traditional and alternative energy sources. The firm also worked on data center projects. With more than five million square feet of data center floor design experience and national recognition for data center construction innovation, CEI’s business has steadily grown in the last year, despite the economic downturn.

Surprisingly, its location in Silicon Valley did not give the firm an advantage for this type of work. According to Boncher, the majority of data center projects are located outside of California. “They’re not in the Bay Area,” he says. “They’re not even in the state.”

As a result, the firm recently announced that it has expanded its data center operations with a new office in Prineville, Ore. “While we have long engineered and constructed data centers in the Pacific Northwest for industry-leading clients, our new office enables us to extend our offerings for current and future data center customers who rely on us to meet their complex electrical needs,” notes Boncher. “Oregon’s business climate, weather, and abundant natural resources make Prineville a great location for our fifth United States-based office.”

In its new location, CEI will hire additional employees. It is not the only firm that added employees in 2011 or has plans to hire this year. Less than half the firms on the Top 50 list reported adding employees in 2011 (Fig. 10). However, 31 are predicting they will add staff in 2012 (Fig. 11). In addition, a dozen firms revealed they opened at least one branch office in the United States last year (Fig. 12), whereas four disclosed they closed at least one branch office in the United States — and four said they acquired a branch office in the United States. Some firms reported both closing and acquiring a branch office in the United States.

To heighten focus on its core strengths, EMCOR implemented a strategy for 2011 that also included the sale of Toronto-based subsidiary Comstock Canada Ltd., to CCL Equities, Inc., for approximately CAD $16.9 million in payment for the shares and approximately CAD $25.5 million in repayment of indebtedness owed by Comstock to EMCOR Group, Inc. In addition, the company acquired Bahnson Holdings and USM Services Holdings. “Over the course of 2011, we undertook a number of actions that further strengthen our business,” said Guzzi. “We increased our focus on our core operations with the sale of our Canadian business, and also took advantage of opportunities to build on our capabilities with the strategic acquisitions of Bahnson Holdings and USM Services Holdings. USM significantly enhances our ability to service multi-site customers and has contributed to push the facilities services segment revenues in 2011 to over $2 billion.”

EMCOR Group’s strategy to divest one company and acquire others that better work toward its existing strengths was a common one in 2011, according to PwC US, which provides industry-focused audit and assurance, consulting, and tax services. Last year, the global industrial products (IP) industry, including engineering and construction, experienced an increase in merger and acquisition (M&A) deal volume over the course of 2011 — 801 deals worth more than $50 million compared to 783 deals in 2010. The majority of these deals within the IP sector were driven by companies focusing on smaller deals, an increase in divestitures, and an uptick in compatible local deals. “2011 was all about smaller deals in industrial products as deal makers remained conservative focusing on deals that were seen as less risky and that needed smaller levels of capital in today’s uncertain economy,” said Bob McCutcheon, U.S. industrial products and metals industry leader at PwC.

According to PwC’s reports, the pace of local deals that were worth more than $50 million increased to 510 deals in 2011 compared to 487 deals in 2010. Industrial products cross-border deals remained flat in 2011 from the prior year — 36.4% of deals worth more than $50 million and 37.8%, respectively. The pace of local market consolidation hastened as IP companies sought compatible enterprises to reduce expenses. “Faced with substantial uncertainty, companies appeared to be opting for growth within their familiar domestic markets,” said McCutcheon. “Such moves limit the legal and cultural risks typically associated with cross-border transactions. We’re also seeing higher growth prospects within emerging markets, which will likely keep Asian acquirers focused on targets within their borders. Mature markets, such as the United States and Europe, also continue to seek domestic consolidation as a tool for growth and competitor elimination.”

A breakout of activity for the engineering and construction industry shows the majority of deal activity in the fourth quarter of 2011 was from small, bolt-on acquisitions, which dropped the average deal value to 2009 low levels of $354 million. With the combination of a sluggish U.S. recovery, reductions in federal and municipal spending, and political gridlock, non-U.S. affiliated deals took the lead in activity during the fourth quarter of 2011.

With regard to this year, the firms on the 2012 Top 50 Electrical Contractors list reported some hesitation regarding acquisition. While 10 firms said they have or will open at least one new branch office in the United States, only two reported they have or will acquire a new branch office in the United States (Fig. 13). This decline in activity is reflected in results for the year so far published by PwC, which reveal M&A activity in 2012 has had a sluggish start. Activity in the engineering and construction industry continued to decline in the second quarter of 2012, primarily due to the continuation of the European sovereign debt crisis, the slowdown in the growth of the Chinese economy, and overall uncertainty of the sector’s growth prospects.

“Engineering and construction deal making remains tied to the overall condition of the global economy due to the highly cyclical nature of the sector,” says H. Kent Goetjen, U.S. engineering and construction leader with PwC. 
“The fragile recovery of the industry and its heavy dependence on government spending, which is being curtailed in numerous countries, combined with the cautious global outlook, have all contributed to reduced M&A activity.”

In the second quarter of 2012, there were 34 deals with value greater than $50 million totaling $10.1 billion, compared to 47 transactions worth $14.7 billion in the same period of 2011. While deal value and volume also declined sequentially from the first quarter of 2012, which saw 37 transactions totaling $12 billion, average deal value remained flat during that time period at $300 million. The United States was the most active individual country, with eight deals totaling $2.8 billion. However, the bulk of the U.S. transactions were local and involved targets in the construction machinery segments, partly as a result of the relatively strong growth in U.S. manufacturing.

“We’re seeing more companies looking to strengthen their position through acquisition,” says Goetjen. “Although I would also observe that some of these acquisitions are of companies doing business internationally, there is some international expansion within those local acquisitions.”