Deal drivers

Angus Miller, Partner and Sheetal Parmasur, Assistant Director, in Deloitte’s business services M&A team explain why the UK FM sector is bucking global M&A trends

It’s no secret that the predicted rebound of global M&A (Mergers & Acquisitions) has not quite had the gusto that commentators expected at the start of the year. A boom in activity was expected, with improved macroeconomic conditions and private equity “dry powder” cited as just some of the reasons why markets would come back strongly.

However, the facilities management sector, particularly in the UK, has bucked that trend. Deal activity in the FM sector has surged, as the market remains highly fragmented across soft services, hard services, and energy services. Notable deal trends include greater interest from private equity, reflected in higher pricing relative to strategics, technological advancements, and a growing emphasis on sustainability.

FM companies continue to seek consolidation opportunities to drive economies of scale through the acquisition of additional capabilities, growing regional density and expanding into new markets. There is also growing interest in businesses with specialised expertise in areas such as energy management and smart building technologies. FM firms are increasingly keen to integrate cutting-edge innovation into existing service offerings to give them a competitive edge.

PRIVATE EQUITY

Private equity firms are focussing on executing their buy-and-build strategies. The sector has become increasingly attractive for private equity given the resilient profile of earnings relative to other more cyclical sectors. These financial attributes of FM businesses also continue to garner strong lender appetite for financing deals in the sector.

There continues to be opportunities within the sector for private equity investment to support transformational growth for stand-alone businesses that are focused on a certain geography or scope of services. Additionally, there remains an attraction to acquire businesses that provide services to high-growth markets – such as data centres and life sciences.

While there are a multitude of factors supporting M&A in the sector, it is worth looking in detail at two key areas that are driving deals:

TECHNOLOGY INTEGRATION AND INNOVATION

Technology is emerging as a strong deal driver. While valuation data on transactions in the sector vary based on business model, scale, financial and operational characteristics, higher valuations achieved have been attributed to businesses with well-developed technology capabilities and tech-enabled service offerings.

FM businesses are increasingly reliant on strong IT platforms for operational efficiency and real-time data insights. An advanced in-house IT ecosystem provides a strong underpin for value if the capabilities around work order management, asset tracking and preventative maintenance scheduling can be managed through streamlined processes that improve overall efficiency. Real-time data enables proactive decision-making, optimises resource allocation and facilitates faster response times to issues. For growing FM platforms, investment in a sophisticated IT system also simplifies integration and reduces complex interdependencies from bolt-on acquisitions.

UK FM companies are also starting to embrace technological advancements to optimise costs and improve tenant satisfaction. Data analytics and Internet of Things (IoT) sensors are increasingly being adopted, mainly in building automation, where computer-based systems control and monitor energy usage, heating and ventilation, helping to ensure not just the safety and security of occupants, but also driving efficiencies. These systems, alongside sensors and data analytics tracking equipment efficacy, drive more predictive outcomes for FM providers to proactively perform maintenance tasks and minimise costs and downtime for building owners, as well as improve user experiences.

Several hard FM businesses are rolling out proprietary or white-labelled energy management and IoT solutions, with varying degrees of success and traction. While some providers are struggling to monetise the capability, others have developed extensive case studies for reducing energy usage and are in early stages of trials. The technology capabilities of mid-tier FM businesses are expected to evolve to be more sophisticated as investment in the sector continues, presenting deal value yet to be unlocked.

ESG AND SUSTAINABILITY LEADERSHIP

The significant opportunity that ESG presents for value creation within the FM sector is starting to appear in deals, where companies with an ESG focus, strong track records, certified sustainable practices and transparent reporting are attracting interest from investors. In turn, businesses that build their service offering around addressing ESG priorities are also attracting high valuations.

No longer just caretakers of buildings, FM companies are increasingly expected to be stewards of sustainability and social responsibility – and rightly so. Technology plays an important role for FM businesses to achieve sustainability targets, as the ability to meet reporting requirements and accountability standards is closely linked to having access to digital tools to measure and optimise ESG success. Regardless of regulatory timelines, the pace of technology adoption will depend on company size and resources and will be driven by clients who prioritise ESG performance.

The convergence of robust investor appetite, technology and ESG principles is creating a dynamic landscape for M&A activity within the sector. As we look ahead, these trends will continue to drive deal value and define the contours of the sector’s M&A market, helping it buck the global trend. Staying informed about these evolving dynamics will be paramount for both investors and companies seeking to capitalise on the opportunities that lie ahead.