Mergers and Acquisitions in HVAC

Inflation, higher interest rates, and election uncertainty are among the factors that have kept many investors cautious for a while, but mergers and acquisitions (M&A) activity is set to rebound in 2025. That activity should be especially strong in the HVAC sector, across manufacturers, distributors, and contractors. 

That’s the assessment of Quinn Carlson, a managing director at Uplift Partners, an M&A advisory firm based in Chicago, Illinois. Carlson spoke to members of Heating, Air-conditioning & Refrigeration Distributors International (HARDI) during the trade group’s annual conference in December. 

Carlson is a believer in the power of a robust M&A market to create interest in businesses by pouring money into them, adding to their value and to their strength in their sectors. 

“The more capital that comes in, the better it is for everybody who’s participating and investing in this market, because it means valuations go up, and (it) means more options,” he said, “and with more options, you have more flexibility to do the kinds of things that might be interesting for you to create value.” 

But because of higher interest rates and other factors, the M&A market has been cool for a while, Carlson said. For the first three quarters of 2024, he said, the number of deals completed was 25% below what it was during the first three quarters of the previous year. The lull, he said, has depressed companies’ market values. 

With lower interest rates and more certainty about who’ll run the federal government, Carlson said, M&A activity is poised to pick up, especially in the HVAC sector. 

Carlson said private equity firms have about $900 billion dollars “sitting on the sidelines,” and that uninvested corporate capital is even higher — about $2 trillion. 

“The investors are going to start to, you know, start to make noises about, ‘There’s a better use for that capital than sitting on a balance sheet,’ ” Carlson said of the corporate liquidity. “Typically, it’s either buybacks, dividends, or acquisition.” 

Pointing to three major HVAC companies, two manufacturers and a distributor, that have outperformed the Standard and Poor’s 500 for the last six years, Carlson said private equity investors “love” the HVAC space. 

“Why do they love it?” he said. “Well, there’s significant replacement demand, steady growth, a favorable regulatory environment (that) continues to support the innovation that is leading to more product innovation and pricing, the ability to adapt and change during times of uncertainty.” Investors also like HVAC’s “reliance on values, quality, and comfort,” he added. 

“The consolidation opportunities are still prevalent in this market, and there’s no sign of that slowing down,” Carlson said. “The market loves that.” 

Zachary Perge, HARDI’s vice president of distribution strategies, said distributors should be prepared for M&A activity involving their contractor customers, which may not directly involve distributors but nevertheless will affect their businesses. 

“This is something that our distributor members have had to face, deal with, some increased pressure from contractors, and how they navigate their business with that,” Perge said. “We don’t see this going away. It’s more about how you can be prepared for it, how you can execute against it.” 

Speaking to suppliers in the room, Perge urged them to involve distributors when facing contractor consolidation. 

“If you’re a supplier, you have to work with your distributors in terms of how to navigate contractor consolidation. Do not bypass them. Do not work directly with PE (private equity) firms on rebates. Have your distributors in that mix,” Perge said. “They’re facing a ton of pressure as consolidation comes on, for margin or potential line switching. So as a supplier, know how you can be a partner in the M&A process with distributors in the face of what we see will be ongoing contractor consolidation.”