A LOOK INTO M&A IMPACT: INCREASED ACTIVITY AND SPONSOR INTEREST
Investors are keenly interested in acquiring quality companies in anticipation of the upcoming infrastructure spending. This presents an opportunity for financial sponsors to gain access to attractive platforms or for strategic buyers to acquire "bolt-on" companies with skilled labor and high-quality equipment fleets. It also creates a chance for existing investors to exit their positions at attractive multiples.
Both financial sponsors and corporate clients are now adopting a one-stop-shop approach to meet their equipment needs by expanding their geographical coverage. This is primarily achieved through M&A activity, which enables vendors to swiftly establish a presence in new regions and gain a larger market share. By increasing their geographic footprint, vendors can offer their clients access to a broader range of equipment and services, which simplifies the procurement process, saves time and money, and ultimately enhances operational efficiency. Clients value the convenience of a comprehensive equipment solution provided by a single vendor, which streamlines operations across multiple locations.
As borrowing rates remain high, financial sponsors may seek value investments while corporate sponsors may offload non-core segments of their business to enhance liquidity or implement a strategic shift. Recently, McGrath RentCorp offloaded its Adler Tank Rentals business while concurrently acquiring Vesta Modular, realigning corporate strategy toward a more focused end market. This dynamic has created a highly active market in the equipment sector, with investors focusing on businesses that align with their strategic goals for long-term growth.
Source: Ashtead Investor Presentation
A LOOK AHEAD INTO 2023
The current market faces several challenges. However, amid the uncertainty, there are notable opportunities. Strong demand, consistent growth, and increased public funding through the stimulus package will serve to benefit companies in the equipment-as-a-service sector. Despite concerns about a possible recession, we remain optimistic about the sector's ability to withstand market headwinds. Moreover, there is widespread anticipation that this investment is the first of many, as the government appears committed to revitalizing American infrastructure. As illustrated in the chart below, two key segments of the equipment-as-a-service sector have significantly outperformed the broader market, reaching levels well above those observed before the pandemic.
Source: S&P Capital IQ
As of the beginning of Q2, analysts remain bullish on the sector, projecting sustained growth due to the persistent high demand. The influx of committed funds toward infrastructure, coupled with a growing number of businesses seeking to reduce costs and decrease capital outlays, provide a distinct competitive edge for the equipment-as-a-service business model. The stock performance of both traditional and specialty rental companies has significantly outpaced the S&P 500, highlighting the sector's strength. It is worth noting that the industry has experienced growth for many years prior to the introduction of government initiatives. While the recent legislative developments are undoubtedly contributing to this growth, they are not the sole driver. Other natural growth factors include the increasing specialization of equipment, the flexibility of rental arrangements, technological advancements, and a heightened focus on sustainability. The combination of these organic growth drivers and government investment places the industry in an optimal position to flourish.
Additional sources: Ashtead Investor Presentation, Herc Holdings Investor Presentation, United Rentals Investor Presentation, Dodge Construction Index, Statista, Pitchbook, Inflation Reduction Act, Chips and Science Act, Infrastructure Investment in Jobs Act.
