Deloitte Real Estate – European M&A Construction MonitorNovember 2011

European M&A Construction MonitorTrends for 2010-2012: diversification through M&A

European M&A Construction Monitor is a publication edited and distributed by Deloitte.

DirectorJurriën Veldhuizen, partner Real Estate, The NetherlandsKees Zachariasse, M&A partner Real Estate, The Netherlands

Coordinated byDerk Jan HellemanHarm DrentHinse Boonen Steven Vrendenbarg

ContactReal Estate Department, Deloitte NetherlandsPhone: +88 288 3281Fax: +88 288 9752

November 2011

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Contents

1. Introduction 4

2. Looking back 5

3. Going forward 10

4. European real estate, construction and infrastructure group contacts 13

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We are pleased to present the first edition of the European M&A Construction Monitor. It looks at the latest trends and issues in mergers & acquisitions (M&A) in the construction industry. This publication complements “European Powers of Construction” (EPoC) of 2010: a Deloitte research paper examining the status of major European listed construction companies.

This Monitor not only looks back at recent activities. It also looks forward, as Deloitte combines the in-depth local M&A, real estate, construction and infrastructure knowledge of its European firms to deliver its own outlook.

Market trends: Sector diversification and internationalisation2010 saw a modest revival of M&A activity compared with 2009, when the construction industry was severely hit by the economic downturn. But since construction companies have historically relied on acquisitions for a third to half of their growth, they are expected to return to acquisitions again. Recently, construction companies were active in acquiring parts of companies – assets and/or projects – in default or potential default, however this type of activity is beyond the scope of this publication.

European top construction companies acquire activities in more profitable sectors such as energy, telecom and waste disposal. Due to higher margins in these businesses compared with traditional construction, this form of diversification is one of the innovative ways to improve profitability in the construction industry. Additionally, these companies tend to offer less volatile services, e.g., long-term service contracts.

A second trend in the construction sector is internationalisation. Cross-border deals are widespread in Europe; they encompass more than a quarter of the deals in the construction sector in 2010. When looking at a three-year period (2008 – 2010), this ratio is even higher: over a third of all deals registered were cross-border.

We analyse the cross-sector and cross-border deals in this European M&A Construction Monitor: looking back, but also looking forward.

1. Introduction

M&A in the European construction sector is hovering and expected to become more diverse and international

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The European construction sector recorded 144 deals1 in 2010

Development 2007-2010In 2007, M&A activity in the construction sector reached a peak before the world economy got hit by the credit crunch, followed by the global financial crisis. Activity dropped in almost all European markets and recorded activity mainly concerned smaller acquisitions and acquisitions of related companies.

In 2009, as presented in the chart below, European M&A activity in the construction industry dropped to a four-year low with approximately 115 deals. With 144 deals, 2010 showed modest, but evident recovery.

The chart shows the trend lines of cross-border deals and cross-sector deals. Both trend lines are ascending. This can be explained by the search for new opportunities that contribute to a good return on investment. New opportunities can be found in the international marketplace but also in different sectors: due to higher margins in other – primarily construction- related – businesses, the sector identifies diversification as an interesting opportunity.

Several companies execute one or both of the aforementioned cross-border and cross-sector strategies. The graph on the next page shows the share of revenue that twenty of the largest European listed construction companies generate from non-construction and non-domestic activities.

2. Looking back

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010

As

% o

f nu

mbe

r of

dea

ls

Num

ber

of d

eals

M&A activity European construction industry

Deals Lineair(Cross border) Lineair(Cross sector)

1 A deal is a transaction involving at least 30% of the shares of a European construction company

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Sector diversification will be discussed first, followed by the internationalisation trend.

Sector diversificationThe two main reasons for sector diversification are margin pressure in the construction sector and risk control as a consequence of uncertainty in income due to the sector’s volatility. The traditional business models in the construction industry show a profitability that is structurally lower than the other activities of construction companies.

The 2010 EPoC presented average profit margins (EBIT/sales) in construction in Europe of 3.7%, compared with profit margins for other activities of 13.3%. The difference in profitability explains construction companies’ interest in sector diversification. Typical other activities are transportation and infrastructure projects, energy-related services and waste disposal.

Especially major construction companies diversify more and more, largely through acquisitions and new participations in joint ventures. The conglomerates have diversified their business portfolio most to non-construction activities: they derive 40% to 70% of their revenues from other activities, compared with more traditional construction groups that derive up to 90% from traditional construction works. Exemplary is Germany-based Bilfinger Berger: an international services group for industry, real estate and infrastructure. The group recently acquired Alpha Mess-Steuer-Regeltechnik, an industrial service provider, and Diemme, which is an Italian filter constructor. More investments (EUR 1 billion total investment volume) in the group’s service segments are expected. At the same time, Bilfinger Berger is reducing its construction activities: they sold a majority share in Valemus (a large Australian construction company) and their stake in US contractor FruCon.

Non

-con

stru

ctio

n re

venu

es /

tot

al r

even

ues

%

International revenues / total revenues %

10%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

20%

30%

40%

50%

60%

70%

80%

90%

100%

"Domestic" Conglomerates International

Conglomerates

International Construction Groups

"Domestic" Construction Groups

ACS

Acciona

Sacyr

FCC

Balfour Beatty

Bilfinger

Ferrovial

OHL

BamYit

Skanska

NCCStrabag

Hochtief

Bouygues

Vinci

Carillion

Eiffage

Peab

Enka

Source: EPoC 2010

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The chart below shows other sectors in which construction companies were active, based on the deals recorded in 2010.

The trend of sector diversification started in the early 2000s in Southern Europe, where large construction companies invested in service companies, e.g., industrial maintenance and offshore installations. As a result, the Southern European (and more specific Spanish) construction sector is overrepresented in terms of cross-sector activities: Spanish construction companies have diversified into a wide range of activities that complement the construction business with a full range of services throughout the entire construction life cycle.

A dominant target sector – besides construction – is the industrial products and services sector, including assembly and installation. Waste disposal and the energy sector are gaining interest from the construction companies: in the last quarter of 2010, Spanish construction firm ACS invested around EUR 2.5 billion to increase its holding in Iberdrola, a windfarm operator. The overview at the right side of this page shows examples of targeted types of businesses.

Increased interest of companies outside the construction industry in acquiring construction

companies is a striking recent development. The main reasons are synergy, providing a broader range of services (risk control), and integrated solutions. Examples of entrants in the construction sector are manufacturers, consulting firms and engineering companies. Example is Holland-based Oranjewoud (high-tech services, engineering and consultancy firm), which acquired Strukton (construction company focusing on infrastructure) in 2010.

Deals in the spotlight: Diversification in EnergyIn July 2010, Grupo Magtel, a Spanish family-owned firm involved in construction and maintenance of projects in telecommunications, energy and infrastructure sectors, sold a controlling stake in Africana Energia to construction & engineering firm Grupo Ortiz and  TSK, an engineering group. Africana Energia is a concentrated solar plant project in Cordoba, with a capacity of 49.9 MW. The total consideration for the deal was EUR 320 million. In June 2011, the three companies raised EUR 293 million for the Africana Energia project. Spain is the world’s largest solar thermal market in installed capacity, with 749 megawatts in operation at 18 locations.

Another example of construction firms acquiring assets in the energy sector is the EUR 2.8 billion transaction in which Spain-based Acciona acquired Endesa’s renewable energy generation assets (2009). In 2008, FCC (Spain) took over the Spanish wind energy assets of Australia-based Babcock & Brown Wind Partners for a consideration of EUR 840 million.

In 2010, Portuguese construction company Soares da Costa acquired a 57% stake in Energia Propria, a Portuguese energy consultancy firm, for a consideration of EUR 6.5 million. Energia Propria operates via subsidiaries in the areas of energy efficiency, building and maintenance of facilities and micro-generation of clean energy through the Self-Energy brand in Portugal, Spain, the United Kingdom and Mozambique.

Other targeted sectors (2010)

34.4%

25.0%

9.4%

9.4%

6.3%

15,6%

Industrial products and services

Services (other)

Energy

Real Estate

Other sectorsUtilities (other)

Examples of target companies in other sectors

Industrial products and servicesIncluding a.o.

- drilling- assembly and

installation*

- manufacturing of HVAC** products

- pollution and recycling

ServicesIncluding a.o.

- energy consultancy- operating motorways- business support

services

EnergyIncluding a.o.

- solar power plant- nuclear fuel

fabrication services- other alternative

energy

*of industrial systems, heating systems and thermal insulations **heating, ventilation and air conditioning

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InternationalisationOver a quarter of the deals within Europe in 2010 (and even over a third when looking at last three years) has been cross-border, reflecting one of the main focus areas of construction companies in recent years: internationalisation. Traditionally geographical diversification focuses on M&A of companies within Europe, but larger international conglomerates and construction groups tend to expand globally, which is mainly prompted by the restricted size of the (Western) European market, its negative development in recent years and the experiences companies have gained.

Two groups of construction companies can be distinguished in internationalisation: international construction groups and international conglomerates. The first group has a strong focus on construction and is typically located in Western and Northern Europe; most cross-border deals are closed by companies in these regions.

The second group is formed by international conglomerates that are diversified both in terms of geography and business. These conglomerates started to expand in Europe and Nothern America and are currently shifting their focus towards the other continents.

Internationalisation through mergers and acquisitions has strongly increased in the last five years. This process started in Western Europe, but has now spread throughout Europe. The chart below shows total M&A activity in European target regions: deals registered are deals of local target companies acquired by national and international companies.

Cross-border deals within the same European regions are presented in the chart on the next page. The chart shows registered deals, located within the specific regions, in which local companies were targeted by international companies.

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2005 2006 2007 2008 2009 2010

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European target regions

Eastern Northern Southern Western (excl. UK) UK

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A geographical shift in cross-border M&A activity can be identified: in 2007/2008 most cross-border deals were in Western and Southern Europe, but in 2009/2010 Northern and Eastern Europe show a remarkable growth in cross-border deals. Cross-border deals as a percentage of all registered M&A deals for Eastern Europe in 2010 amounted to 43% (2009: 36%). The same ratio for Northern Europe was 30% (2009: 13%). An increase in cross-border activity in these regions is a result of more attractive forecasted growth and construction margins within the Northern and Eastern European markets compared with other European regions. This also explains part of the decrease in cross-border activity in Western Europe: the region became a less attractive target. At the same time, several Western European construction companies have been focusing on the local market and withdrew from the international market, explaining the remainder of the decrease in cross-border activity in this target region: available attractive targets were largely taken up by local companies.

Cross-border deals in Southern Europe diminished due to the financial crisis. On the other hand, Spanish construction companies invested heavily in the acquisition of companies abroad. ACS acquired 50% of the German construction giant Hochtief in 2011, finalising a deal that commenced in the pre-crisis period of 2006/2007. ACS, Ferrovial, FCC, and OHL have done significant acquisitions of local companies in the UK, Poland, Central Europe and the USA over the last three years.

Deals in the spotlight: Internationalisation by ACS-HochtiefIn June 2011, Spanish construction firm ACS (sales EUR 15.4 billion) announced that it holds a 50.16% majority stake in German construction firm Hochtief (sales EUR 20.2 billion). ACS acquired a first stake of 25.1% in 2007, raised it to 29% in November 2010 and eventually launched a voluntary public tender offer for Hochtief in December 2010.The bid valued Hochtief at EUR 4.97 billion. The 50.16% stake allows ACS to consolidate Hochtief, which results in a significantly improved leverage ratio.

The deal is considered to be one of the largest hostile takeover bids in Germany for many years and was characterised in the press as a nine-month takeover saga since ACS first expressed its interest in an all-share takeover in September 2010. In order to dilute ACS’s holding, Hochtief sold a discounted 9.1% stake to Quatar Holding.

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European cross border deals (by region)

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The outlook on M&A activity in EuropeThe M&A activity in the construction sector for the coming years is highly unpredictable, not least because of Eurozone turmoil in the second half of 2011. Different European countries foresee different levels of M&A activity. The table below provides a quick

overview of the views of local Deloitte specialists on the short- to medium-term outlook of M&A activity within the European construction industry.

Subsequent pages will discuss these views more extensively by region.

3. Going forward

Country Outlook Highlights

France o / + • Smaller PPP type transactions • Sector diversification, e.g., energy infrastructure

sector

Germany o • Growth strategies mainly outbound focused• No major M&A activity of large construction

companies expected

Ireland o • Number of deals will match or marginally exceed 2010 levels

The Netherlands o / + • Increase in (mainly smaller-size) deals• Consolidation; distressed transactions

Poland o / + • Large local and international construction companies will acquire smaller, local construction firms

Spain o • Post-merger integration and stabilisation

Sweden o / + • Local and international transactions: both Swedish and non-Swedish construction companies are active

• Major infrastructure projects proceed

United Kingdom o / + • Decrease in the availability of capital to invest• UK construction companies become more attractive

to foreign investors

Czech Republic o / + • Potentially interesting moment for strategic investors to enter the market

+ optimistic / o neutral / - pessimistic

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Western and Northern EuropeDifferences also exists within the Western European region: both the activity in the Netherlands, which is foreseen to double in the coming three years compared with 2010, and the activity in Ireland, which merely anticipates transactions to pick up “somewhat”, are exemplary.

In France, M&A activity is anticipated to be driven by smaller PPP type transactions in, for example, the energy infrastructure sector. Since construction industry growth has not been significant, several companies will refocus their portfolios on sectors like industrial services, energy/power services, building (renovation and restoration) and facility services (maintenance, installations, waste, etc.). Other growth opportunities within the Western European construction sector identified by local Deloitte specialists are infrastructure (e.g., Germany and Sweden) and health care (e.g., the Netherlands).

The UK economy and construction outlook looks challenging: new orders in the construction industry are at a thirty-year low, which affect the availability of capital to invest in M&A activity through 2012 and beyond. Although this would seem to make the UK market unattractive, it also means that UK construction (related) companies could be attractively priced to raise foreign investment.

M&A growth strategies within the overall construction sector are mainly outbound focused. Whereas most of the active companies search for M&A opportunities within Europe to broaden their geographical footprint, several large construction companies are expected to look further abroad from 2012/2013 onwards, in markets such as the Americas, Russia, and Asia because of forecasted GDP growth and construction margins. An example of international expansion is Hochtief: the company recently pronounced that the company is about to acquire a construction company in Canada with over EUR 100 million revenues per annum, while they are considering acquiring a civil engineering business in India. Another example is Holland-based Volker Wessels Stevin, which is expected to become active in North America.

Additionally, consolidation is expected as several small and mid-sized construction firms find it hard to cope with their finances in current market conditions; further distressed transactions are likely. A Dutch example is the

takeover of parts of Heddes by Ballast Nedam earlier this year.

Southern EuropeThe financial crisis has strongly affected Southern Europe and its construction markets and M&A activity. The coming period will be used to assess the damage and M&A activity is anticipated to be marginal.

Previously we mentioned that Spanish construction companies have diversified into numerous activities to complement the construction business. Recent years however, this development has been decelerated caused by the necessity to reduce the level of leverage. Several of them decided to sell non-core activities in order to reduce leverage to a more acceptable level. This divestment process will certainly continue in 2012 if financial conditions for potential buyers become less adverse. In the coming years, M&A activity in Spain will be limited to marginal acquisitions of niche companies. Cross-border activity of Spanish companies will be less than last years (although some activity is anticipated where Spanish construction companies acquire local companies in the US and Central Europe) and, taking into account the financial markets constraints, it is expected that 2011 and 2012 will be years of post-merger integration and stabilisation, with companies focusing on synergies from previous mergers and acquisitions.

Eastern EuropeM&A activity was at a reasonably high level in recent years – mainly smaller-size deals – due to an accelerated development of the construction market. The construction market has been stimulated by significant public investment (partly financed with EU funds) in road infrastructure, as well as the EURO 2012 football tournament, which Poland and Ukraine will host. From 2012, M&A activity will primarily come from large companies and international construction companies that are already present in the market acquiring smaller, local construction firms. Consolidation is also a trend in Eastern European countries: small and mid-sized companies will be forced to merge as a result of financial distress.

It can be an interesting time for investors to enter these markets through acquisition. Local Deloitte specialists point out that the Eastern European opportunities will be more attractive to strategic investors since payback periods will be longer.

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To conclude: what to expectThe sector is disproportionally affected by the financial crisis. The general focus within the construction industry will be on risk control and increasing profitability. Reduced risk and increased profitability can be reached through internal “operational excellence” programmes and through the key industry trends: sector diversification and internationalisation. Economic developments, though, and the possibility of another global downturn might well shatter the anticipated effects of aforementioned strategies, especially for traditional construction companies that have failed to implement sufficient sector diversification.

Differences can be identified between the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) and other European countries: although M&A activity is expected to increase in Europe, activity is expected to be low in the PIIGS. Nevertheless, several large PIIGS-based firms are active in other European markets. It is foreseen that mainly international construction conglomerates will become active in non-European markets.

Cross-sector diversification will gain in popularity: construction companies will look into other sectors to broaden their traditional construction offering and non-construction companies will look into the construction sector (i.e. forward and backward vertical integration).

Although the number of transactions is expected to increase in the medium to long-term, triggered by cross-sector diversification and cross-border expansion strategies, this will be significantly impacted by the availability of cash. In the long-term we expect the trends to result in a worldwide consolidation, leaving less but larger, multi-disciplined players in the global construction industry.

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4. European real estate, construction and infrastructure group contacts

Region Name Telephone Email

Austria Marieluise Krimmel +43 (1) 537 00 2412 mkrimmel@deloitte.at

Bruno Moritz +43 (1) 537 00 4300 bmoritz@deloitte.at

Nikolaus Mueller +43 (1) 537 00 7575 nmueller@deloitte.at

Belgium Jean-Paul Loozen +32 (2) 639 49 40 jloozen@deloitte.com

Pierre-Hugues Bonnefoy +32 (2) 800 20 35 pbonnefoy@deloitte.com

Rick Neckebroeck +32 (2) 800 20 22 rneckebroeck@deloitte.com

Luc Van Coppenolle +32 (3) 800 89 05 lvancoppenolle@deloitte.com

Central Europe Michal Petrman +420 (246) 042 520 mpetrman@deloitte.com

Miroslav Linhart +420 (246) 042 598 mlinhart@deloitte.com

Diana Radl Rogerova +420 (246) 042 572 drogerova@deloittece.com

Maciej Krason +48 (22) 51 10 360 mkrason@deloittece.com

Denmark Jeppe Schoenfeld +45 (36) 10 3 427 jschoenfeld@deloitte.dk

Lars Kronow +45 (36) 10 27 86 lkronow@deloitte.dk

France Marc de Villartay +33 (1) 5561 2716 mdevillartay@deloitte.fr

Germany Franz Klinger +49 (89) 29036 8362 fklinger@deloitte.de

Michael Mueller +49 (89) 29036 8428 mmueller@deloitte.de

Greece Alexis Damalas +30 (210) 678 1100 adamalas@deloitte.gr

Michael Hadjipavlou +30 (210) 678 1100 mhadjipavlou@deloitte.gr

Ireland Michael Flynn +353 (1) 417 2515 mflynn@deloitte.ie

Kevin Sheehan +353 (1) 417 2218 kesheehan@deloitte.ie

Padraic Whelan +353 (1) 417 2848 pwhelan@deloitte.ie

Italy Elena Vistarini +39 (02) 833 25122 evistarini@deloitte.it

Luxembourg Benjamin Lam +(352) 451 452 429 blam@deloitte.lu

The Netherlands Paul Meulenberg +31 (0) 88 288 1982 pmeulenberg@deloitte.nl

Jurriën Veldhuizen +31 (0) 88 288 1636 jveldhuizen@deloitte.nl

Kees Zachariasse +31 (0) 88 288 2127 kzachariasse@deloitte.nl

Norway Frode Lid +47 (23) 279 676 flid@deloitte.no

Aase-Aamdal Lundgaard +47 (23) 279 282 alundgaard@deloitte.no

Thorvald Nyquist +47 (23) 279 663 tnyquist@deloitte.no

Portugal Joao Costa da Silva +351 (21) 042 7511 joaolsilva@deloitte.pt

Miguel Eiras Antunes +351 (21) 042 3825 meantunes@deloitte.pt

Miguel Heredia +351 (21) 042 3047 mheredia@deloitte.pt

Spain Javier Parada +34 (91) 514 5000 japarada@deloitte.es

Miguel Laserna +34 (91) 514 5000 mlaserna@deloitte.es

Sweden Andreas Adolphsson +46 752 462 21 03 aadolphsson@deloitte.se

Turkey Cem Sezgin +90 (212) 366 6036 csezgin@deloitte.com

UK Makhan Chahan +44 (0) 20 7007 0626 mchahal@deloitte.co.uk

Jack Kelly +44 (0) 20 7007 0826 jackkelly@deloitte.co.uk

Nigel Shilton +44 (0) 20 7007 7934 nshilton@deloitte.co.uk

Chris Watts +44 (0) 20 7007 7939 chrisjwatts@deloitte.co.uk

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