Small, strategic, bolt-on acquisition and corporate divestitures dominated M&A activity in 2014 in the construction materials segment of aggregate, asphalt and ready-mixed concrete producers. These small, strategic transactions were successful because the strategic benefits of the deal resulted in pricing that satisfied both buyer and seller. These deals were often among competitors with all the typical benefits associated with eliminating local competition. Additionally, there were continued planned divestitures by some of the major players in the sector to continue balance sheet management to raise capital for targeted acquisitions. We also saw the return of growth acquisitions in new markets for select players.
More buyers have returned to the market. Specifically, the publicly traded companies, who wrestled with excessive leverage post the collapse of the financial markets in 2008, have improved their balance sheets and returned as buyers. There remains no shortage of prospective sellers; however, pricing differences continue to be the biggest challenge to closing deals. The sector is cautiously optimistic about increased deal activity in 2015.
Growth in the sector is dependent upon residential construction and federal and state highway funding. The good news is that the residential sector has shown recent strength and is expected to continue as shown in Exhibit 1. Conversely, highway funding has been victim to politics in Washington since the expiration in the fall of 2009 of the last major bill – SAFETEA-LU. As shown in Exhibit 2, funding has been relatively flat in recent years with significant deferral of maintenance of rods and bridges. For the first time in five years, there is some optimism that Congress can pass a long-term funding bill the passage of which would result in a significant increase in deal activity.
Exhibit 3 shows the performance of the FMI Construction Materials Index, a composite of 12 construction materials companies versus the market as a whole using the S&P 500 and Dow Jones Industrials average as proxies. As shown, the construction materials sector outperformed the market in the run up of the residential housing boom, experienced a sharp drop as the housing market collapsed, and has not returned to its high in 2007. At the same time, the overall market recovered nicely and has been establishing new highs.
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