HVAC Services M&A Update – June 2024

Fervent Consolidation Efforts Spur HVAC Services Sector M&A Activity

The characteristically fragmentated Heating, Ventilation, and Air Conditioning (HVAC) Services merger and acquisition (M&A) market has witnessed a rise in transaction volume through year-to-date (YTD) 2024 as sector players expand service offerings and geographic footprint. Driven by smaller acquisitions of private businesses, tuck-ins have materialized at a pace mirroring 2021, when deal flow in the broader M&A market was at an all-time high. Private and public strategics have continued to employ inorganic strategies to accelerate growth. Of note, Sila Heating & Air Conditioning has spurred a rise in private strategic deals. Sila, a provider of residential HVAC, plumbing, and electrical services in the Northeast and Mid-Atlantic regions, has made 27 acquisitions since receiving a minority stake investment from Morgan Stanley Capital Partners (MSCP) in May 2021 (undisclosed). The company announced three acquisitions in April, consisting of T-Mark Plumbing, Essential Power Systems, and Glasco Heating & Air Conditioning. Terms for the deals were undisclosed. Additionally, public strategics have demonstrated an appetite for M&A, leveraging strong cash positions on balance sheets to make acquisitions. Leading building services provider, Limbach Holdings (Nasdaq:LMB), has pursued inorganic growth to bolster its Owner Direct Relationships (ODR) segment, a high margin business less impacted by macroeconomic trends. “By expanding and evolving our service offerings, we believe that we can grow market share with existing customers and position Limbach for recurring revenue streams from these ODRs while flexing with our customer needs between operating and capital project budgets. All this equals a business with attractive organic and acquisition growth opportunities, less volatility, and more consistent execution,” Mike McCann, President and CEO of Limbach, said on the Q1 earnings call.¹ The HVAC Services M&A market is expected to continue its upwards trajectory in 2024 as public and private players target complementary service offerings and geographic synergies.

The current market environment is favorably tilted towards service providers that have critical mass (i.e. EBITDA in excess of $10 million) and a hefty orientation toward preventive maintenance and repairs (i.e. recurring revenue). These types of deals are the most financeable, a critical component for current market activity.

Ted PolkManaging Director, Co-head of Industrials, Capstone Partners

Defensible Demand for Maintenance and Repair Reinforces HVAC Services M&A Market

Technologically advanced industrial applications for HVAC parts and systems have proliferated across the broader sector, bolstering the necessity for continued service, maintenance, and repair, as outlined in Capstone Partners’ April 2024 HVAC Equipment Sector M&A Update. This demand has facilitated a robust 12.3% year-over-year (YOY) growth in HVAC Services deals with 64 deals announced or completed in YTD 2024 compared to 57 deals in the prior year period. Notably, public strategics have reignited their interest in the HVAC Services sector. Public buyer deal volume has rebounded from three deals in YTD 2023 to 11 in YTD 2024 as portfolio and geographic diversification and recurring revenue generation remain top of mind. Private equity add-ons have continued to account for the second largest share (21.9%) of deal activity but have registered a 30% decline YOY, with 14 deals announced or completed in YTD 2024. Despite dampened add-on activity, private equity firms have increasingly deployed growth capital investments to support private strategic acquisitions in the HVAC Services sector.

Equity Capital Investments and Partnerships Offer Additional Support to Sector Growth

Growth equity investments into late-stage private companies have tracked 2019 levels as growth investments through 2023 totaled $155 billion—surpassing 2019’s full-year total of $145 billion, according to Capstone Partners’ Equity Capital Markets June 2024 Update. Early projections estimate that 2024 growth capital is set to reach $177 billion as investments into these companies totaled $44 billion in Q1 2024. Higher financing costs, reduced lending, and valuation disconnects have persisted, resulting in acquirors targeting alternative avenues for growth. These trends have acted as tailwinds for deal activity in the HVAC Services sector as growth capital investments and partnerships have managed to aid companies in accelerating their business plans and acquisition strategies.

Notably, middle market private equity firm Tenex Capital Management announced an investment in R.F. Fager, a distributor of roofing, plumbing, and HVAC supplies (April, undisclosed). Additionally, Trinity Hunt Partners announced that its commercial HVAC platform, NexCore, partnered with commercial HVAC systems services provider Sylvester & Cockrum (S&C) in May (undisclosed). The partnership with S&C is expected to drive NexCore’s momentum in the Commercial HVAC Services space, building off the platform’s initial investment in Alliance Group (April 2023, undisclosed). “It has been gratifying to experience the traction NexCore has gained thus far, as we have thoughtfully positioned ourselves in the industry as a strategic partner who provides opportunities for sustained growth with a do no harm approach,” said NexCore CEO, Steve Knowles, in a press release.² The shift among sector participants to act as strategic partners has allowed for continuous deal activity in the space despite persistent macroeconomic headwinds.

Crete United’s Acquisition Activity Highlights Extensive Consolidation in the Services Market

Leading provider of HVAC, electrical, plumbing and building automation services, Crete United, has undergone a significant expansion since Ridgemont Equity Partners assumed a controlling interest in the company (June 2022, undisclosed). Crete has deployed a focused M&A strategy, supported by an organic growth engine, which has spurred the acquisition of eight companies in 2023 and two more in YTD 2024. These deals bring Crete’s total add-on acquisition count to more than 40 businesses with annual revenues exceeding $680 million and on pace to top $1 billion annually over the next few years, according to a press release.³ Crete generated ~40% revenue growth in 2023 and rebranded from Crete Mechanical Group to Crete United in early 2024 to expand into the Building Services market—a move which supports Crete’s upstream diversification strategy. Notably, the acquisition of Pro Star Energy Solutions (March 2024, undisclosed) signaled Crete’s diversification into the Data Center end market with Pro Star serving five of the largest 15 U.S. data centers, according to a deal press release.⁴ Its building automation solutions have helped propel Crete’s new strategic vision. This includes eIQ, a web-based tool used to remotely monitor comfort and performance, and Catalyst, a complete rooftop unit (RTU) retrofit solution for HVAC systems. Several additional key developments in Crete’s business are highlighted below.

Private Equity Reaffirms Affinity for HVAC Services M&A

Private equity firms have demonstrated a continued interest in the HVAC Services M&A market YTD through a variety of investment vehicles. These vehicles have included growth funding to support private businesses’ M&A strategies, platform acquisitions of leading participants with scale, and add-on transactions to bolster existing portfolio companies. Several notable transactions illustrating sponsors’ influence and activity in the HVAC Services M&A market are outlined below.

• Refrigeration Design & Service Acquires Dahms Refrigeration Services (May, Undisclosed) – Refrigeration Design & Service, a commercial and industrial mission critical mechanical services company, completed the acquisition of Dahms Refrigeration Services (DRS) in May for an undisclosed sum. Pennsylvania-based DRS is an industrial and commercial refrigeration contracting company serving various sectors, including Cold Storage Warehouses, Dairy Processing, and Food Preparation. Through the transaction, Refrigeration Design & Service gains a skilled labor force specializing in refrigeration maintenance and service, while expanding its geographic reach and reinforcing its Mid-Atlantic market leading position. The acquisition was supported by Refrigeration Design & Service’s corporate parent, The Kelvin Group, an industrial refrigeration services business backed by private equity firm Southfield Capital.
• Point 41 Capital Partners Acquires Interstate AC Service, Kimbro Mechanical, and Open Source Controls (January, Undisclosed) – In January, middle market private equity firm Point 41 Capital Partners acquired the combined operations of Interstate AC Service, Kimbro Mechanical, and Open Source Controls. Terms of the transaction were undisclosed. The acquisition strengthens Point 41’s portfolio of HVAC, plumbing, and building automation solutions and diversifies its markets in the Industrial, Education, Warehouse, Government, Healthcare, and Data Center segments.

"We have significant experience building market-leading technician-driven services companies. Commercial services remains a highly fragmented sector, and we quickly identified Interstate as a consolidator of choice. Interstate's experienced management team, diverse service capabilities, high-quality customer service and exceptional company culture will enable us to scale the platform," said Jordan Wadsworth, Managing Partner of Point 41, according to a press release.⁵

• Saw Mill Capital-Backed Climate Pros Acquires HD Energy (January, Undisclosed) – Climate Pros, a Saw Mill Capital portfolio company, acquired HD Energy for an undisclosed sum in January. Montreal-based HD Energy provides refrigeration, HVAC asset optimization, and remote energy performance monitoring services to grocery and retail customers. HD Energy will bring complementary capabilities to Watchtower, Climate Pros’ technology platform. Watchtower uses advanced analytics and artificial intelligence (AI) to provide customers with predictive maintenance solutions, improving asset up-time, performance, and sustainability. The addition of HD Energy to this platform will create a comprehensive HVAC and refrigeration optimization platform.

To discuss the financing for HVAC Services M&A, provide an update on your business, or learn about Capstone's wide range of advisory services and HVAC Services sector knowledge, please contact us.

Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.

Endnotes

1. Seeking Alpha, "Limbach Holdings, Inc. (LMB) Q1 2024 Earnings Call Transcript," https://seekingalpha.com/article/4691308-limbach-holdings-inc-lmb-q1-2024-earnings-call-transcript, accessed May 16, 2024.

2. Trinity Hunt Partners, " Trinity Hunt Partners’ Commercial HVAC Platform, NexCore, Partners with Sylvester & Cockrum," https://www.trinityhunt.com/news/trinity-hunt-partners-commercial-hvac-platform-nexcore, accessed May 16, 2024.

3. Business North Carolina, “Ridgemont-backed Crete United sets up for growth from Charlotte,” https://businessnc.com/ridgemont-backed-crete-united-sets-up-hq-in-charlotte/, accessed May 16, 2024.

4. Ridgemont Equity Partners, “Crete United Acquires Prostar Energy Solutions to Elevate Energy Efficiency as a Core Offering,” https://www.ridgemontep.com/press-releases/crete-united-acquires-prostar-energy-solutions-to-elevate-energy-efficiency-as-a-core-offering/, accessed May 16, 2024.

5. PRWeb, “Point 41 Partners with Interstate AC Service, Kimbro Mechanical and Open Source Controls,” https://www.prweb.com/releases/point-41-partners-with-interstate-ac-service-kimbro-mechanical-and-open-source-controls-302029893.html, accessed May 16, 2024.