The M&A Market for Residential and Commercial HVAC, Plumbing and Electrical Services (“H/P/E”) Looks Poised for Acceleration through 2025 as Economic Headwinds Dissipate
After a somewhat sluggish start to 2024, Q4 and momentum into ‘25 paints a rosier picture for M&A as inflation continues to moderate and monetary policies loosen. With 23-year high interest rates, 40-year high inflationary numbers, and political uncertainty during an election year, many acquirors in the HVAC, Plumbing and Electrical space have been largely content focusing on integration and maximizing operating synergies across their respective platforms; a necessity after years of high-volume M&A – these groups are unlikely to put their inorganic growth initiatives on hold for much longer as the market ramps back up.
The HVAC, Plumbing and Electrical Services sector continues to garner vast interest from the private equity community, which saw prolonged periods of significant transaction volume from 2019 – 2023. These acquirors are now being forced to become increasingly aggressive as economic conditions stabilize resulting in heightened competition among bidders, and in turn driving premium valuations.
As a trusted advisor to owners and executives in both the Residential and Commercial HVAC, Plumbing and Electrical services markets, we leverage our industry-specific knowledge, relationships with key market constituents, and M&A expertise to achieve optimal outcomes for all shareholders.
We welcome a confidential conversation to discuss your options and strategy in this rapidly consolidating market.
Housing costs and an increasingly aged U.S. housing stock have driven sector growth.
Despite some recent, moderate increases in mortgage rates over the past several weeks (6.44% for the 30yr fixed rate as of October 17th), we’ve still seen significant downward movement from the 7.79% seen in October of 2023. The U.S. housing market over the last several years has been defined by high interest rates and steadily rising home prices due to a lack of supply forcing would-be-buyers / sellers to remain on the sidelines. As a result, housing starts have waned, placing even more strain on an already aged U.S. housing stock (Median age of owner-occupied homes in the U.S. now sits at 40 years with ~75% of those homes being built prior to 2000).
As housing starts have continued to lag demand, expect the current maintenance and R&R trends within H/P/E to hold firm, or perhaps accelerate, as existing homes age even further past their prime requiring large ticket upgrades / maintenance projects to remain on-par with current standards and other regulatory and environmental initiatives.
The M&A market for H/P/E services is poised for a flurry of activity as the Fed lowers rates.
While it remains unknown the scale and pace at which the Fed intends to lower interest rates through year end and into ‘25, one thing seemingly guaranteed is that further rate relief should spur a healthy increase in deal activity. As key constituents in H/P/E continue to lean heavily on inorganic growth initiatives, the Fed’s easing on monetary policy is likely to jump start M&A initiatives for many of the market’s most aggressive regional and national consolidators.
Many larger, well-established platforms are also likely to come to market in 2024/2025. Given the number of scaled platforms formed in the 2019 – 2022 period, and considering the typical Private Equity hold period (3-5 years), we may see several large-scale assets looking to transact in the coming 18 months.
Shifting market dynamics present challenges for independent operators’ ability to compete.
Running any business has its challenges, however, as H/P/E continues its rapid consolidation, independents navigating the current landscape are faced with an uphill battle for market share (60+ regional and national platforms in the U.S.). In response, independent operators must continually look for new ways to differentiate themselves in local markets against competitors with substantially more scale and resources.
Operational challenges such as skilled labor shortages, rising wages, interest rate volatility, pricing challenges, and supply chain disruptions can have a significantly outsized impact on smaller businesses often limiting top-line growth and decreasing margins over the short- and long-term.
Exploring a potential transaction represents an opportunity to capture monetary value for the years of hard work and business building – i.e. taking ‘chips off the table’. It can also better position the business for its next stage of growth with a partner that can help weather the increasingly complex nature of the H/P/E services industry.
Maximizing valuation and flexibility in deal structure remains top-of-mind for sellers.
Whether you are considering an exit from the business entirely or retaining a meaningful ownership position, continuing in an operational role or looking for a clean break, finding the right buyer and deal structure are key to achieving the desired outcome.
With fewer operators of scale ($10M+ EBITDA) in the market, competition has increased amongst H/P/E consolidators. Acquirors are now being forced to compete not only on price, but terms as well, allowing sellers flexibility and negotiating power when structuring a transaction.
Preparation is paramount and remains a key differentiator in any M&A process.
It takes approximately 6 months from start to finish to complete a private sale in the industry, but at Anchor Peabody our work often starts much earlier. The more preparation time the better the outcome. Understanding the company strategy, the management team and bench, the strength of the finance and accounting team, the growth plan and its defensibility are all key to achieving a successful transaction. We work with potential sellers months and sometimes years before they ultimately plan to go to market.