European construction deals could be put in the freezer if conflict in the Middle East heats up and keeps oil prices high for a sustained period.

Brent crude jumped above USD 75 per barrel as Iran responded to Israeli attacks on its proxies in Lebanon and Yemen. Although both sides appear to be taking care to avoid a full-scale regional war, the risks of a miscalculation, on either side, could be catastrophic.

An oil price consistently above USD 80 per barrel is a critical level, according to one European energy consultant. Above that level, the risks of a recession in Europe increase substantially. That would be particularly bad news for cyclical industries like construction, which is very sensitive to the impact of fuel prices on shipping building materials.

So far in 2024, European construction has registered 792 deals worth an aggregate EUR 17.2bn, according to Mergermarket data.

One particularly large deal came in July. Turner Construction Company, a New York City-based provider of construction services, agreed to acquire 100% of Dornan Engineering Group.

Dornan is a specialist mechanical, electrical, instrumentation and commissioning engineering contractor with operations in its home market of Ireland, as well as the UK, Continental Europe, and the Nordics. The target’s 1,000 direct employees will deliver approximately USD 760m of work in 2024.

Tepid growth

Gross domestic product (GDP) growth has been tepid in Europe as the continent appeared to be heading for a soft landing after central banks struggled to contain inflation shocks, which began to accelerate when Russia invaded Ukraine in 2022.

Eurozone GDP grew by 0.6% in the second quarter of the year from the same period last year. Meanwhile, UK GDP grew 0.7% in the second quarter of the year.

Inflation is a further risk. If the hostilities in the Middle East spiral out of control, driving up fuel prices, the European Central Bank (ECB) and the Bank of England might have to reconsider their rate-cutting plans, which could dampen sentiment throughout the economy.

The ECB cut rates for the second time in September; while the Bank of England made a first cut in August.

Eurozone inflation is expected to be around 1.8% in September, below 2.2% in August. This will be the first time the figure has come in below the ECB’s medium-term inflation target of 2% since June 2021. Meanwhile, UK inflation was 2.2% in August, which is slightly above the Bank of England’s target of 2%.

Strong pipeline?

The pipeline of European construction deals had been strong until the increasing hostilities in the Middle East began to change the perception of macro risks.

For example, Alvic, a Spanish kitchen and office furniture manufacturer backed by KKR [NYSE: KKR] and Artá Capital, is expected to come to market before the end of the year, although a sellside advisor has yet to be appointed to oversee the process. The company has a score of 71 out of 100, according to Mergermarket‘s Likely to Exit (LTE) predictive algorithm.*

Meanwhile, Primutec Solutions Group’s owner DPE Deutsche Private Equity has launched a sale process for the Dutch-German roofing and insulation services provider. It has an LTE score of 69.

Finally, One Equity Partners (OEP) and Buckthorn Partners have been exploring a sale of Amey, a UK-based engineering, operations and decarbonisation service provider, as reported in July.

European dealmakers thinking about deals in cyclical sectors like construction, will have to keep a close eye on headlines in the Middle East, as well as the oil price, as they analyse the completion risks of transactions.