Paving the Way for Increased M&A?

Exploring the New Infrastructure Law’s Near- and Long-Term Impacts

The recently enacted $1.2 trillion Infrastructure Investment and Jobs Act (“IIJA”), commonly known as the federal infrastructure law, is a historic effort to begin making up for decades of underinvestment in the built environment on which the American economy depends.

Passed with bipartisan support and signed into law by President Biden in November, the legislation includes $559 billion(1) in new spending on physical infrastructure over the next five years. The money is earmarked to upgrade roads, bridges, and highways and modernize critical infrastructure networks such as power grids and web access.


Historic, Yes—But Only a Start


The law’s enactment—especially in a Congress otherwise paralyzed by partisan gridlock—is an encouraging sign that legislators recognize the gravity of the current state of infrastructure in the U.S., but it’s only a first step.

In its most recent annual “report card” on the state of national infrastructure, the American Society of Civil Engineers gave 11 of 17 categories a “D,” or “Poor,” grade, while only two received a “B,” or “Adequate for Now,” grade. In fact, the Society estimates the U.S. would need to spend an additional $2.59 trillion(2) over the next ten years—almost five times the size of the current law’s total allocation—to modernize and bring all aspects of the nation’s infrastructure up to an adequate level. An “Excellent” level—ready to support future growth and needs¬¬—is even further from reach.

“The (act) reflects a hard-fought compromise agreement and a show of commitment from Congress to make a significant down payment on America’s physical infrastructure assets, and to give local communities the flexibility they need to design solutions for today’s complex challenges,” the ASCE said in a statement about the legislation(3).

In the coming year, state and local agencies should bring forward projects they would like to build, and money should start flowing out from the U.S. Treasury.

This raises important considerations for leaders of industrials and industrials-adjacent businesses. As advisors focused on this sector, we expect three groups to benefit directly from the increased spending:

  1. Industrial services companies, including general contractors and sub-contractors, as well as specialty contractors and companies, focused on infrastructure or infrastructure-adjacencies
  2. Manufacturers of construction materials—such as steel, cement, aggregates, and asphalt—that are essential inputs into new infrastructure projects
  3. Supply chain-critical businesses, including distributors, wholesalers, and transportation and logistics companies that will be essential links in project execution and stand to benefit from a demand surge as projects move through the pipeline

Industrial Services Will Be in Pole Position

Contractors and related service providers are expected to be the first-order beneficiaries of the law. The Surface Transportation Reauthorization Act will increase annual funding for bridges, roads, and highways by 34%(4) over the next five years. Elevated budgets will drive a significant increase in projects for heavy civil contractors, from excavation and underground water utilities to construction and paving, as well as for steel fabricators focused on bridge construction.

Additionally, utility contractors are expected to benefit from the funding earmarked for electric vehicle charging stations, broadband deployment, and general electrical grid enhancements. Other contractors servicing transportation infrastructure projects will see a significant pickup in activity driven by amounts earmarked for transit, airports, waterways, ports, and rail.

Furthermore, the ecosystem of contract-based service providers to the construction and engineering industries should see a general uptick in business that is more fragmented and less reliant on megaprojects. Increased usage of heavy equipment contractors for many of these projects should also increase maintenance, repair, and overhaul (“MRO”) services demand.

Manufacturers Must Rally to Meet Increased Demand

Infrastructure projects already represent a meaningful share of construction materials demand. For example, ~40+% of Vulcan Materials’ and Martin Marietta’s aggregate shipments over the past five years were directed toward publicly funded construction projects(5). So, at the most basic level, producers of construction materials—such as aggregate, steel, concrete, and asphalt—should see greater volume associated with additional projects funded by the law. Many state DOTs expect the IIJA to increase annual funding to specific infrastructure programs by more than 30-40%(6).

In addition, the law will drive increased demand for products used directly in the construction process. Manufacturers of construction equipment and building materials machinery will also see a demand increase. Producers of coatings, paints, additives, water and wastewater pipes, guardrails, and other road supplies should proactively tackle inventory, backlog, and capacity constraints to prepare for the demand swell.

The Biden administration’s preference to “Buy American” should tighten the ripple effects of spending from the infrastructure law, which we expect to be good news for domestic tertiary industries.

Smoother Roads Ahead for Supply Chain Facilitators

The significant investment aimed at modernizing transportation and logistics infrastructure has far-reaching implications—for the companies involved in the projects themselves and for businesses regularly utilizing such infrastructure. Our nation’s deteriorating roads currently force drivers to spend ~$130B each year on extra vehicle repairs and operating costs(7). Upgrading and expanding the transportation and logistics network—from roads and bridges to rail and airports—will improve connectivity and create supply chain efficiencies critical to meeting consumers’ increased expectations of just-in-time delivery. Improved infrastructure quality can lower accident rates and maintenance issues while improving access to more rural areas. Companies should assess how to invest in their supply chain, digital capabilities, and footprint to take advantage of system upgrades, new regulations, and requirements.

As the catalyst between production, installation, and construction, the supply chain will be a critical component of success. As such, companies involved in distributing and transporting the products and materials these projects require stand to see meaningful demand growth. The Bureau of Economic Analysis estimates the trucking industry alone will see $2.7 billion in economic impact from bridge and highway spending, placing it eighth on the list of non-construction impacted industries. Distributors with exposure to heavy civil, federal, and utility contractors should prepare for a significant benefit.

There’s No Speeding in a Construction Zone

It’s going to take some time for projects to work their way through funding and permitting, which means it will likely be many months—or in some cases, years—before companies feel the full impact of the legislation.

In some ways, that may be a positive thing. Any project that is truly “shovel ready” at the start of 2022 is going to face near-term headwinds from labor shortages and the still-backed-up supply chain.

Thus, we expect a long-term, secular, and upward shift across a broad range of industries that will be directly impacted by the increased levels of spending as it trickles out over the remainder of this decade.

Even with the passage of this law, American infrastructure spending remains well below the investment threshold needed to bring domestic infrastructure assets up to competitive levels on the global stage. As a result, we believe that the U.S. will require a second round of infrastructure funding in the years ahead to ensure the nation can effectively compete globally with emerging players, particularly China. This additional investment will open the floodgates and allow companies to take full advantage of the workforce, training, and equipment they will acquire during this initial round of spending.

Potential Impacts on M&A

Historically, limitations such as bonding requirements and labor market constraints have dampened financial sponsor activity in the services and contracting niches. Given these dynamics, companies in these sectors have remained largely locally-owned, and their verticals are highly fragmented.

With the new dynamics at play, firms now looking to land larger contracts could be motivated to seek acquisitions, partnerships, and joint venture agreements that better position them to compete. While increased economic activity in a space doesn’t necessarily lead to M&A, the construction space has become one of the last vestiges of limited private equity activity as investors are sitting on record amounts of dry powder. As seen through the industry’s over 800 completed deals in 2021 YTD, with private equity making up over 40% of that activity(8), competition for deals is increasing. The paradigm is beginning to shift as financial investors look to engage in the space more actively.

For a generation of owner-operators who may want to time their exit to an anticipated surge in business, the next few years could present a compelling and historic opportunity, with an “up and to the right” trend in both demand and buyer interest. In the middle market, there are a growing number of subsectors where roll-up strategies are increasingly more prevalent and compelling.

Paving the Way Forward

For business owners who hope to benefit from the rising tide of the infrastructure law, now is the time to be patching any potential potholes within your business. That may mean investing in workforce training, creating a plan to staff up for expected growth, or contemplating creative ways to use M&A or other corporate development tools to take advantage of this unprecedented opportunity.

Our team is here to offer insights and expertise from our four decades of experience in the space. Please reach out if we can be of assistance.

(1) Source: US Receives ‘C-‘ Grade in 2021 | Infrastructure Report Card
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(3) Source: Congress Passes Historic Infrastructure Bill | ASCE’s 2021 Infrastructure Report Card
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(8) Source: PitchBook

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