HVAC Equipment Market Update – September 2024

Robust Demand for Power and Energy Transition Drives HVAC Equipment Market

Capstone’s latest HVAC Equipment Market Update reports that the current shift in technologies and market conditions in the HVAC Equipment sector has unlocked opportunities for supplying innovative, energy-efficient, and climate-conscious solutions amid the move to alternative energy.

Consistent with overall market norms, merger and acquisition (M&A) volume has continued at a tepid pace with 68 deals announced or completed year-to-date (YTD), a 6.8% decrease year-over-year (YOY). A large portion of the initial transaction inventory in 2024 has been fueled by the emergence of new end market applications and energy efficient systems. Strategic buyers have maintained their dominant market presence with 76.5% of transactions YTD. Public strategics have enjoyed robust share price appreciation and have deployed capital for inorganic growth initiatives. Private strategic buyers have comprised a significant percentage of acquisitions (41.2%) with many manufacturers seeking to add robust design capabilities to their portfolio offerings. Private equity buyers (23.5%) have actively targeted the sector YTD, utilizing add-ons to drive incremental value for existing holdings.

HVAC technology is not reliant on just fossil fuels, such as oil and gas, and increasingly can support space and water heating using solar, wind, or even geothermal technologies. Notably, the share of renewables’ power generation YOY is projected to rise from 30% in 2023 to 37% in 2026. This is significant given that power generation is growing and reached a record 29,925 terra watts per hour (TWh). Public strategics have recognized the shift in energy consumption and have committed to significant investments.

Of note, Applied Materials (Nasdaq:AMAT) announced its latest investment in an Equipment and Process Innovation and Commercialization (EPIC) Center facility designed to accelerate the collaborative development and commercialization of semiconductor processes and manufacturing equipment computing technologies in the sector (May 2023). The company has invested more than $20 billion in research and development (R&D) in the past 10 years and has projected future investments to total $3 billion per year, according to its Q2 2024 earnings call. Large, transformational capital commitments to advanced facilities and operations are forecasted to materialize downstream, bolstering demand for HVAC equipment. Infrastructure used for manufacturing semiconductors and computing, like that of Applied Materials, requires maintaining precise temperature and humidity levels to meet stringent standards. These environmentally controlled units (ECUs) have been increasingly incorporating advanced technologies such as variable speed drives, smart controls, and eco-friendly refrigerants to reduce energy consumption and emissions. As the industry has progressed towards more sustainable practices, the integration of energy-efficient ECUs has become pivotal in balancing operational excellence with environmental responsibility. HVAC equipment that proves complementary to Semiconductor, Healthcare, Aerospace, and Data Center end markets is expected to garner significant buyer appetite, draw premium valuations, and drive energy consumption, which is anticipated to bolster M&A activity through 2024 and 2025.

Also included in this report:

• Why key end markets have received heightened attention and investments for ECU applications.
• A breakdown of average enterprise value and valuation multiples in the space and the characteristics that have fueled middle market acquisition appetite.
• What recent sector mega deals reveal about the evolving strategies and M&A appetite among active buyers, especially a resilient cohort of private equities.

Capstone Partners’ Industrials Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the HVAC Equipment Market. Our team partners with leading mid-to-large sized businesses that serve growing end-markets.

For more information on the HVAC Equipment Market trends featured in this report or to speak with one of our Industrial M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today.