Critical Transport Infrastructure Services
Following a strong period of M&A activity, the UK critical transport infrastructure services sector is expected to remain highly attractive to institutional investors and strategic acquirers over the coming months, driven by excellent resilience and a multitude of positive market growth drivers.
driven by resilience and a multitude of positive market growth drivers.
Many service providers in highways and rail are carrying out essential, non-discretionary repair and maintenance following decades of under investment in critical infrastructure. Ongoing upkeep of crucial assets is vital and largely driven by a requirement to keep the population safe, partially shielding the sector from economic downturns, as currently being experienced.
Resilience and sector growth drivers
The highways sector has proven immensely resilient during the recent COVID-19 pandemic. In March 2020, the Government announced a strategic road investment of more than £27bn in the UK between 2020-2025, up from £15bn for the previous five years. The commitment demonstrates the necessity of improving the network as well as confirming that front line, essential infrastructure is a compelling area for government spend given the long-term benefits for the wider economy.
The rail network is also part way through its five year spend period, CP6. Spend across the network between 2019 and 2024 is expected to reach £42bn, increasing expenditure on maintenance and renewals by c.25% versus CP5 to improve the safety and reliability of the network. After a relatively slow start to CP6, spend is beginning to materialise and we expect more momentum in spend across the control period and beyond.
Services in highways and rail are also becoming more technical, automated, data-focused and often technology led, with increasingly stringent regulations being driven by an escalating focus on health and safety. This is resulting in the delivery of attractive margins for many in the sector, with customer spending decisions being focused on surety of safe and efficient delivery, rather than price.
Highways England is currently seeking greater responsibility for the network, engaging directly with specialist service providers as opposed to delivery through generalist Tier 1 contractors. This is proving highly advantageous for many specialists in the space, enabling them to secure direct, multi-year frameworks driving strong levels of secured, repeat and recurring revenue.
The likes of Highways England,
Network Rail, Tier 1 contractors and local authorities are increasingly seeking
suppliers that can carry out essential services more safely and efficiently.
Those meeting such requirements are often doing so through a focus on
innovation and automation, as well as utilising data and other technology to
deliver services.
There is also increasing scrutiny on suppliers’ Environmental, Social and Corporate Governance (ESG) focus, particularly for those working directly with ultimate owners of the assets.
Whilst it is likely that Government and Local Authority budgets will face significant pressures over the coming years, specialist service providers involved in the repair and maintenance of critical infrastructure are still expected to remain buoyant. This is largely due to ultimate owners of the assets having the inability to neglect the upkeep of the infrastructure and compromise the safety of the networks. They are also subject to stringent legal, regulatory and compliance requirements and the resilient nature of the sector is a core investment thesis for many institutional investors looking to deploy capital in the space.
Recurring maintenance opportunities provide a robust growth story, but longer-term projects such as the transition to autonomous vehicles, smart cities, the electrification of the rail network and HS2, provide transformational and exciting growth opportunities for many.
Buy and build strategies
Service providers in highways and rail often possess a range of similar characteristics including but not limited to national depot networks, specialist vehicle fleets and highly skilled operatives, providing extensive synergy potential for trade acquirers across multiple disciplines.
attractive to institutional investors seeking suitable platform investments to deliver buy and build strategies
By way of example, M Group Services has been highly successful in executing a buy and build strategy within the critical infrastructure services space in recent years. The specialist transport division has recently acquired the likes of Dyer & Butler, Antagrade Electrical, KH Engineering Services and Skanska’s infrastructure services division, providing excellent coverage across a broad range of specialist road and rail services.
The fragmented nature of the sectors is also attractive to institutional investors seeking suitable platform investments to deliver buy and build strategies, as demonstrated by H2’s investment in Amberon, Triton’s acquisition of Chevron and Primary’s investment in Readypower.
Recent Clearwater International experience
Clearwater International has acted as lead advisor on the recent sale of two standout transactions in the space. In October 2019, LDC secured a majority investment in SRL Traffic Systems (SRL), the UK’s leading manufacturer, renter and service provider in temporary traffic lights and other Intelligent Transport Systems. SRL systems are predominantly utilised during periods of repair and maintenance of the UK’s highways or critical utility maintenance activity.
This was followed by WJ Group (WJ) securing a majority investment from THI Investments in December 2020. WJ is the UK’s leading supplier of road marking and specialist technical highway products and services. The partnership will enable WJ to expand its products and services and make further investments in innovation and technology, as well as executing additional strategic acquisitions.
Clearwater International is active across the full landscape of critical infrastructure services, leveraging the most relevant sector transactional experience and having access to highly interested financial investors and strategic acquirers. The resilient nature of the sector and high barriers to entry are also becoming increasingly attractive to long capital and core-plus infrastructure investors. We have seen strong competition on recent transactions in the sector and we expect to see demand to continue with further high levels of M&A activity in the coming months.
If you would like to discuss our recent experiences and understanding of the space, please do not hesitate to contact Paul Jones, Zack Goddard or another member of the Clearwater International team.
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Clearwater adviseurs
Adviser to the management team of SRL Traffic Systems on its MBO supported by LDC and Crescent Capital
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Clearwater adviseurs
Adviser to WJ Group on its investment from THI Investments
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