Industrial Services and Infrastructure

A combination of trends is underlying this growth:

• • Aging Infrastructure. Industry commentary across gas and electricity networks indicates a substantial need for upgrade. In the electricity grid, capacity growth has failed to keep up with energy demand, while managing infrastructure averaging 40 years of age. The gas industry shares the same challenges with 35% of pipelines sharing a similar age profile – the estimated 75,000 miles of pipeline deemed “leak-prone” by regulators represents over 20 years of repair backlog for utilities.
  • Focus on Grid Stability and Enhanced Regulatory Scrutiny. The combination of a growing level of climate change events, along with the instability inherent in the addition of renewable energy sources into power grids have resulted in a greater focus by utilities on improving levels of reliability and service quality to consumers. This comes alongside efforts by regulatory bodies in the enforcement of mandatory grid reliability standards.
    
  • Supportive Government Spending Initiatives. Efforts like the Infrastructure Investment and Jobs Act are infusing funds to support large infrastructure projects related to high-speed Internet delivery, clean water access, and power grid upgrades, among others. This, along with predecessor programs, is expected to continue to support capital spending by utilities and ultimately, work with utility services providers.
  • Increased Outsourcing In the Face of Challenging Labor Markets. Given the estimated 25%+ of utility workers retiring within the next ten years, and the lack of skilled labor resources more broadly, the industry has accelerated its adoption of the outsourcing model, providing access to cost effective solutions while meeting regulatory requirements for reliability.
  • Access to New Technological Solutions. From smart technologies, security challenges and automated workflows to the Internet of Things (IoT), utility and industrial operations are more complicated than ever, requiring specialized labor to keep complex equipment and other assets operating reliably. At the same time, digital transformation efforts in both sectors require a wide range of services to ensure effective implementation and support.
  • Growth in Domestic Manufacturing from Re-Shoring. With more manufacturing shifting back to North America, as a means of diversifying sourcing and minimizing supply chain risks, there is a corresponding increase in demand for the industrial services these businesses depend on.

The same trends that are driving demand for utility and industrial services have attracted the attention of investors. While deal volume is not quite at the peak levels of 2021, M&A activity remains robust, with a great deal of capital available. Uncovering investable situations where a company has long-term relationships and a critical mass in field operations is increasingly difficult, giving established businesses an advantage when engaging in potential transaction dialogue. And with organic growth increasingly difficult to achieve due to the scarcity of available labor, growth by acquisition is a common strategy.

The latter is driving continued consolidation in both the utility services and industrial services sectors. When large services businesses succeed in securing new contracts but struggle to staff them, acquiring a smaller competitor is often the best solution—enabling them to scale without the challenges of attracting and retaining staff. Growth by acquisition also helps businesses in these sectors to innovate faster and more cost effectively, leveraging acquired technologies and labor to expand and enhance their offerings. Not surprisingly, businesses that offer a compelling technology story—especially related to efficiency improvements and operational savings—have had little trouble garnering investors’ interest at attractive market valuations.

Founders and business owners may have a long-term vision for their company before contemplating an exit and may be able to accelerate achieving that vision by acquiring a competitor, an adjacent service provider, or a strategic player with access to a unique and desirable corporate competency.

The factors that drive acquirors to buy a utility or industrial services company are similar to those that will propel you to acquire a sector competitor. If growth through M&A is central to your business strategy, it will be important to prioritize key criteria during the review of a target’s operations and financial profile.

Key characteristics may include:

• • The scale of the business’ field operations, including employee profile, asset composition, and equipment profile
  • A diversified mix of services, key customers, and portfolio of contracts
  • The corporate infrastructure and ability to support future growth, either organically or through M&A, without incremental capital investment
  • Expansion opportunities and synergies for the combined entity, through new customers, attractive markets, and cross-selling
  • High levels of recurring revenue from existing customers and stable gross margins, given cost trends relative to current contracts
  • Differentiating use of technology in field operations that may be applied to the acquiring business’s existing operations

Along with these essential characteristics, be sure to look for a target company that is serious about selling and shares your core values and objectives. While the numbers need to make sense, it’s equally vital to find a partner you can work with effectively for the long term.