With strengthening economic conditions, access to inexpensive financing, and the leading players’ never-ending desire to grow, it is no surprise to anyone serving the HVAC industry that big-ticket acquisitions continue to hit the newswire with regular frequency. The transaction environment for HVAC equipment and component players remains robust with a number of high-profile deals completed or announced thus far in 2014. Strategic acquirers are aggressively pursuing growth through acquisitions, and the premium prices these buyers have been paying for assets are reflective of their optimism for the sector. Other diversified sector participants are rationalizing their portfolios through divestiture to focus on faster-growing and more profitable segments of the HVAC systems spectrum, or they are electing to exit the sector, given the quickening pace of consolidation. Additionally, ample access to low interest rate financing, coupled with the long-term growth prospects of the sector, has driven significant interest from the private equity community. Industry chatter points to a number of other deals in various stages of the sales process.
A Protracted Period of Growth
With economic conditions continuing to improve, we believe the HVAC sector is in the early stages of a protracted cyclical upswing that will be characterized by stable growth, creating fertile ground for continued consolidation. We see this reflected in the performance of publicly traded HVAC equipment businesses — the shares of which have increased 140 percent since the recovery took hold in 2010.
Across the residential and commercial HVAC markets in Europe and North America, continued growth will likely be further supported by various non-cycle factors, notably the increasing demand for energy-efficiency products and awareness of IAQ. Technology will also continue to play an important factor in the evolution and growth of the sector. We believe we are at a pivotal technological intersection of equipment/components and system controls. The adoption and demand for smart systems and integrated building controls is likely to drive a stronger emphasis on integrated systems, and the equipment players that embrace and integrate these technologies into their equipment offerings are likely to emerge as the leaders in their respective product categories.
What is Influencing Deal Activity?
Consolidation is not a new trend within the HVAC equipment and component sector — it is what has led to the “big five” players, including Carrier Corp. (United Technologies), York (Johnson Controls Inc.), Lennox Intl., Trane (Ingersoll Rand), and Rheem Mfg. Co. But it is important to note what continues to drive consolidation efforts across the sector: access to (or utilization) of sales channels, expedited geographic expansion, incremental product additions, and financial growth. We believe these drivers will continue to drive activity as long as the market gravitates to larger, consolidated players that can offer a comprehensive, if not singular, solution for customers’ HVAC system needs. Since the broader economic recovery commenced, a number of high-profile transactions have been completed with activity notably increasing in 2014. A selection of these transactions has been profiled above.
Consolidation Isn’t Just for Equipment Manufacturers
While we have focused on the notable transaction activity across the HVAC equipment landscape, it does not mean that continued acquisition activity and consolidation is quickening across the service sector. At its core, consolidation across the HVAC services universe will drive increased utilization of labor as well as further leveraging administrative capabilities. Comfort Systems USA, a large pure-play HVAC service provider, is a good benchmark for acquisition activity within the HVAC services sector. Comfort Systems recently acquired DynaTen Corp., a Texas-based privately held contractor, the latest in its series of smaller tuck-in acquisitions. Look for continued small-deal activity from Comfort Systems and other larger regional contractors in the coming quarters. Additionally, with the increased integration of equipment and technology, we believe we will likely see a similar convergence of mechanical contractors and building systems installers/integrators within the service sector. This could potentially play out faster with maintenance-focused service providers specializing in commercial applications, given the increased adoption of integrated monitoring systems and the increasing prevalence of predictive maintenance capabilities. No matter how large or small your business may be, strategic acquisitions and combinations should be a topic you evaluate on a regular basis to keep pace with the broader competitive landscape.
Information courtesy of Raymond James & Associates. The company actively covers the HVAC sector through its General Industrial Investment Banking Group. The firm recently advised ABB/Thomas & Betts on the sale of its Reznor HVAC business to Nortek. For more information, please contact Frank McGrew at 615-665-3626 or Michael Stockburger at 901-579-2705.
Publication date: 8/4/2014