Canadian construction companies, strengthened by government stimulus projects and the end of the economic downturn, are casting about for acquisitions as the work they bid on gets bigger and more complex.
Most of the moves they make are expected to be small, bolt-on acquisitions with a bias to Western Canada, where activity in the oil sands is picking up. But a surprise deal last week by Aecon Group Ltd could herald bigger things ahead.
Aecon, Canada's biggest publicly traded construction company, snapped up almost 15 percent of competitor Churchill Corp in a friendly deal. Despite its protestations that it has no plans to buy control of Churchill, many watching the industry believe the deal may be just an opening salvo.
"It's one of those acquisitions that has multiple possible outcomes. In its simplest form it was a chance to acquire shares of what we believe is a very high quality company at a great price," said Paradigm Capital analyst Corey Hammill.
"In its most elaborate potential it could be a first step in maybe trying to see if there is a merger opportunity of two companies... I think it's too early to know."
Any move by Aecon to swallow Churchill whole could be years away. Meantime, Aecon says its plan is "to explore areas of mutual interest". That is likely to mean joint bids on big projects or teaming up in locations where one of the companies isn't as strong as the other.
"Projects are getting more and more complex, they're getting larger, and that's forcing a lot of companies to consolidate," said Raymond James analyst Frederic Bastien.
Most of the juicy C$12 billion ($11.8 billion) set aside for building projects in the federal government's 2009 recession-busting stimulus plan is being put to work this year, mainly on roads, bridges, sewers and university buildings.
In the past few months, there have been a number of large contract wins -- the C$1.7 billion northern Ontario hydroelectric project awarded to Aecon and privately owned Peter Kiewit Sons Co earlier this month, for instance.
"Companies entered the downturn with outstanding balance sheets. During the downturn those balance sheets only got stronger because they all earned very good profits off what was in their backlog," said Canaccord Genuity analyst Yuri Lynk.
"Now companies probably have a little bit more confidence given what they see to put that balance sheet to work and execute some M&A," he said.
Despite two big deals in the sector this year -- Aecon-Churchill and Churchill's C$380 million acquisition in May of Seacliff Construction Corp -- most analysts expect a lot of little deals as big companies pick off smaller ones to expand their service lines or geographic reach.
Because barriers to entry are low, the construction sector is notoriously fragmented, providing much prey in the thousands of small, often family shops, for larger predator companies.
Acquisitions are likely to be skewed to Canada's West, a "hotbed" of activity right now, according to Paradigm's Hammill.
"I expect that to continue strong. There is a lot of stimulus spending being spent in Western Canada. Oil sands spending is really going to support spending in Alberta and there is growing spend in Saskatchewan," Hammill said.
Prices could pose a challenge though, particularly for targets in the engineering sector, which is consolidating, Raymond James' Bastien said.
While construction sector buys are expected to be mostly domestic, engineering businesses such as IBI Income Fund, Genivar Income Fund and SNC-Lavalin Group Inc, Canada's biggest engineering firm, are likely to look abroad as they are already well-positioned at home.
A strong Canadian dollar, which is once again almost equal in value to the U.S. dollar, is giving financial muscle to companies wanting to make acquisitions offshore.