Buyers Bet on Infrastructure, With or Without Trump

Industrial acquirers are doing what President Donald Trump can’t when it comes to infrastructure: putting their money where their mouth is.

Jacobs Engineering Group Inc. announced on Wednesday it would acquire CH2M HILL Companies Ltd. for $3.27 billion including debt. CH2M, which gets much of its business from government clients, was a project manager for the expansion of the Panama Canal. It will bolster Jacobs’ expertise in water-systems upgrades, pushing buildings and infrastructure services to 32 percent of revenue, up from 21 percent previously.

Deal Snapshot

Jacobs’s purchase of CH2M is reasonably priced, with an Ebitda multiple within the range of comparable industrial deals; factoring in $150 million in targeted annual cost savings, the multiple drops to 6.9

Source: Bloomberg, company presentations

The deal’s $150 million of cost synergies and 25 percent earnings accretion are decent on their own. But on a call to discuss the transaction, executives made clear the big motivator here is growth. Jacobs is targeting a 4 to 5 percent compound annual growth rate in the global water infrastructure market, which it sizes at $100 billion. When it comes to the U.S., the potential growth in water infrastructure is even higher, executives said, noting the state of neglect of infrastructure management in the West and Midwest in particular.

The deal is the latest in a $22 billion flurry of M&A bets on rising demand for infrastructure upgrades since Trump claimed electoral victory in November. Also on that list are Deere & Co.’s $5.2 billion purchase of road-paver and rock-crusher maker Wirtgen Group and Clayton, Dubilier & Rice’s $2.5 billion deal for HD Supply Holdings Inc.’s waterworks unit.

Under Construction

Jacobs’s revenue has been under pressure, partly because of a slump in its business serving the oil and gas industry; the CH2M deal should mitigate some of that exposure

Source: Bloomberg

This rush to get positioned for an infrastructure-spending boom is a striking contrast to the stalled progress in Washington on legislation of any kind, let alone Trump’s proposed $1 trillion infrastructure plan. But like the private-equity firms raising buckets of money for infrastructure-focused funds, industrial firms are wagering the country’s roads, bridges and sewer systems have gotten so bad they can’t be ignored for too long.

The American Society of Civil Engineers gives U.S. drinking water a D grade, on par with its assessment of the country’s decrepit roads. Utilities are currently averaging a pipe-replacement rate of 0.5 percent a year; at that speed, it will take 200 years to replenish a water system that was largely laid in the early to mid-20th century and has a lifespan of 75 to 100 years, the group notes. Allowing more privatization could help ease funding gaps, providing a cash influx from which Jacobs and CH2M stand to be prime beneficiaries.

Wait and See

Jacobs shares were essentially flat on news of its CH2M deal; such mergers often have integration issues, and investors may be waiting to see how the deal plays out

Source: Bloomberg

The good news for investors is that the Jacobs-CH2M deal isn’t just a blind bet on branches of the U.S. government finally getting their act together on infrastructure. Water-systems services have already been growing industry-wide at around 8 percent to 10 percent per year, executives said on the call. Jacobs has a stronger international footprint and should be able to sell CH2M’s products, particularly in water and environmental remediation, to its client base abroad.

But should anything like Trump’s $1 trillion infrastructure spending bill ever actually materialize, these companies and their dealmaking rivals will be ready.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at [email protected]

To contact the editor responsible for this story:
Mark Gongloff at [email protected]

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