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Articles | Feb 14, 2024

Environmental Health & Safety (EHS) Market Update – February 2024

Regulatory Environment Intensifies, Vitalizing M&A Activity in EHS Market

Throughout 2023, there has been a notable surge in demand within the Environmental Health & Safety (EHS) market. This trend has been fueled by an increased outsourcing of occupational health and safety solutions, coupled with a growing emphasis on sustainability initiatives. As a result, public market players have reported robust top-line growth, reflecting the heightened demand in the sector.
For instance, MSA Safety (NYSE:MSA), a leading player in the EHS sector, disclosed a remarkable revenue growth of 17% year-over-year (YOY) in Q3, with a well-balanced contribution from unit volume and pricing strategies, as outlined in its earnings transcript. Similarly, Intertek Group (LSE:ITRK) experienced steady revenue growth, rising by 7.3%, driven by strong performance in its Health and Safety division, according to a November trading update. Other notable players such as Clean Harbors (NYSE:CLH) and Alpha Pro Tech (NYSE:APT) have witnessed significant appreciation in their share prices throughout 2023, with increases of 52.9% and 31.6%, respectively. These positive outcomes underscore the optimistic outlook for continued growth in the EHS sector in 2024, particularly amidst tightening regulatory frameworks.
Regulatory bodies have been actively pursuing greater accountability, reporting, and transparency in workplace safety practices. Notably, the Occupational Safety and Health Administration (OSHA) announced new regulations targeting high-hazard industries, mandating the electronic submission of incident logs into a searchable database. This initiative aims to enhance awareness and facilitate strategic interventions to mitigate worker injuries and illnesses. With the implementation of these regulations on January 1, 2024, stakeholders anticipate improved insights that will inform decision-making regarding workplace safety and health.
Furthermore, EHS compliance plays a pivotal role in integrating Environmental, Social, and Governance (ESG) standards into organizational practices. Amidst sustainability imperatives and evolving geopolitical dynamics, businesses are increasingly incentivized to conform to ESG standards. While the U.S. has been relatively slower in enacting legislative frameworks compared to other developed nations, regulatory bodies like the Securities and Exchange Commission (SEC) have proposed sustainable disclosure regulations. These regulations aim to mandate climate-related reporting in financial statements and require companies to disclose information about climate-related risks, including greenhouse gas emissions. The lack of standardization in ESG reporting underscores the importance of businesses integrating ESG frameworks and robust process systems, which can positively influence perceptions among large institutional investors.

Heightened Regulations Cultivate Continued EHS Market Interest from Strategics and Sponsors

During 2023, the Environmental Health & Safety (EHS) market witnessed an uptick in merger and acquisition (M&A) activity, with a total of 164 transactions announced or completed, marking a slight 1.2% increase year-over-year (YOY). Notably, private strategics accounted for a larger share of total transactions, representing 45.1% of the market in 2023 compared to 35.8% in the previous year. Additionally, public strategic buyers expanded their sector exposure by 12.0%.
However, the lending environment experienced tightening conditions, leading to heightened selectivity among private equity buyers. Despite this, private equity firms remained notably interested in the EHS market. Add-on acquisitions, comprising 28.0% of transaction volume in 2023, remained popular, particularly among private equity firms seeking targets with high revenue visibility, specialized products and services, and attractive end market exposure.
M&A valuations in the EHS market underwent normalization from the record multiples observed in 2021. In 2023, the average multiples stood at 1.7x EV/Revenue and 12.6x EV/EBITDA, representing an increase from the prior year's averages of 1.3x EV/Revenue and 12.2x EV/EBITDA. Despite this adjustment, the sector remained attractive for investors, driven by factors such as specialized offerings and favorable market dynamics.

Outsourcing Drives Services Segment M&A Activity

 
Continued regulatory oversight is expected to compel businesses to seek specialized third-party manpower and compliance expertise, leading to a surge in demand for qualified professionals in the Environmental Health & Safety (EHS) sector. Establishing this expertise in-house, particularly in recruiting and nurturing a specialized workforce, has proven challenging for many companies. Consequently, numerous players are turning to outsourced solutions to ensure compliance in a cost-effective manner.
Various end-markets, including Pharmaceuticals, Biotechnology, E-Commerce, and Construction, are intensifying efforts to meet compliance standards and achieve Environmental, Social, and Governance (ESG) goals. Adhering to these standards not only helps in avoiding fines and violations but also facilitates cost-saving synergies and mitigates reputational risks with customers, stakeholders, and the public.
Within the sector, the Services segment has dominated deal activity, accounting for 54.9% of total transactions, while deals involving EHS equipment manufacturers have declined by 20.1% year-over-year (YOY). Companies are increasingly relying on outsourcing expertise for recruiting, training, and managing specialized workforces, particularly for capital projects.
Noteworthy players such as ALS Limited (ASX:ALS), a leading global technical services provider, have pursued acquisitions to capitalize on prevailing megatrends such as the transition to clean energy, heightened regulatory enforcement, and growing demand for sustainability-linked services. CEO Malcolm Deane highlighted these trends in the company's recent earnings transcript, citing them as drivers for the firm's six acquisitions in fiscal year H1 2024.
Similarly, Lakeland Industries (Nasdaq:LAKE) has responded to the evolving regulatory landscape by implementing a strategic acquisition strategy termed SSQ (small, strategic, and quick). This approach focuses on identifying targets of similar size that are highly accretive to the short-term bottom line, as outlined in the company's earnings transcript. Such initiatives reflect the industry's proactive stance in adapting to regulatory changes and leveraging market opportunities for growth.

In 2023, the M&A volume within the EHS Software market surged by 41.2% year-over-year (YOY), with 24 deals announced or completed, compared to 17 deals in the previous year. This significant increase reflects the growing recognition among Environmental Health & Safety (EHS) providers of the importance of software solutions in tracking compliance and enhancing safety, particularly in light of OSHA regulations mandating online incident tracking and the rising prominence of artificial intelligence (AI) technologies.
One notable transaction in this space was EcoOnline's acquisition of Alcumus' EHS Software business in January 2023, the financial details of which were undisclosed. This acquisition underscores the increasing adoption of software solutions by EHS players to meet evolving regulatory requirements. The deal aims to establish a globally leading presence in EHS software-as-a-service (SaaS) solutions, with a focus on creating safer and more sustainable workplaces across diverse industries such as Retail, Construction, and Manufacturing, as highlighted in a press release.
The strategic emphasis on software solutions within the EHS sector reflects a broader trend towards digitalization and automation to streamline compliance processes, improve safety outcomes, and drive operational efficiencies. As regulatory requirements continue to evolve and the demand for comprehensive EHS solutions grows, M&A activity in the EHS Software market is likely to remain robust, with companies seeking to enhance their offerings through strategic acquisitions and partnerships.

Consulting Services See Heightened Interest from EHS Market Participants

Environmental Health & Safety (EHS) market participants have been navigating a progressively complex regulatory landscape, leading to heightened demand and buyer interest in consulting services businesses. These services often provide cost-effective, tailored solutions tailored to specific industry verticals within the segment. Recent notable consulting transactions within the space are outlined below.
ESF Equity, LP Assists HazTek LLC in Its Acquisition by Code Red Safety, a Portfolio Company of Warren Equity Partners (November 2023) - Based in Medford, New Jersey, HazTek is among the nation’s largest independent providers of safety management services for facility capital projects. In addition to consulting services and safety training, HazTek offers on-site safety personnel for large-scale projects and ongoing maintenance. Serving leading brands in high-growth sectors such as pharmaceuticals, data centers, and e-commerce, HazTek employs over 300 staff members, including 275+ full-time field professionals with various specialized certifications and experience levels. For more information, visit haztekinc.com.
“We selected ESF Equity, LP due to their extensive track record of success and their expertise in advising founder-owned businesses through the sales process. They comprehensively understood our objectives for a successful transaction and promptly presented numerous qualified buyers meeting our criteria. Consistently acting in HazTek’s best interest, we are grateful to the ESF Equity, LP team for being our advisory partner and assisting us in achieving the best possible outcome for our employees and us.”
Bowman Consulting Group Acquires Blankinship & Associates (November 2023, Undisclosed) - Engineering services firm, Bowman Consulting Group (Nasdaq:BWMN) acquired Blankinship & Associates. Bowman has completed 12 acquisitions in 2023, and 27 acquisitions since its initial public offering in May 2021. The deal was funded by a combination of cash, seller’s notes, and equity, providing additional portfolio expansion of real estate, energy, infrastructure, and environmental management solutions expertise.
“Their reputation as a leading source of environmental sciences and engineering services was what originally drew us to Blankinship, but as we got to know them it was their professionalism and unrelenting can-do culture that compelled us to make them part of Bowman. Their practice will be of immediate value in every aspect of our business, and we expect there to be significant revenue synergy and wallet-share expansion opportunities created by this acquisition,” said Gary Bowen, Chairman and CEO of Bowman Consulting, in a press release.
GI Manager Acquires Atlas Technical Consultants (January 2023, $979.2 million) - Atlas Technical Consultants (Nasdaq:ATCX), a leading infrastructure and environmental solutions provider, has been acquired by private investment firm GI Partners in an all-cash deal for an enterprise value of $979.2 million, valuing Atlas at 1.6x EV/Revenue and 13.9x EV/EBITDA. Atlas stockholders will receive $12.25 per share in cash for each share of Atlas common stock, a premium of approximately 124% over Atlas’ January 30, 2023, closing price. As a result, Atlas common stock has been delisted from the Nasdaq exchange.
“This transaction recognizes the value our team has created over the last five years. Our partnership with GI Partners represents a new and exciting chapter for our employees and our customers. We are aligned in delivering exceptional service and helping our clients design and complete infrastructure projects that improve their communities,” said L. Joe Boyer, Atlas’ CEO, in a press release.
As additional regulations take effect in 2024 and businesses continue to seek outsourcing support to meet EHS standards, strategics and private equity buyers are likely to increase sector exposure. Equipment and Services EHS segments are expected to rebound through 2024, while the Software space is anticipated to experience continued growth, maintaining healthy transaction volumes.
To discuss the extensive shift in regulation compliance, provide an update on your business, or learn about ESF Equity, LP's wide range of advisory services and EHS market knowledge, please contact us.

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