Des Moines Register
08-26-07
Road builders combine; costs stay steady so far
More of Iowa's highway firms are consolidating, but price-increase fears have not
been realized. What's ahead?
By WILLIAM RYBERG
REGISTER BUSINESS WRITER
Iowa's highway construction industry is the latest to experience consolidation putting companies in the hands of fewer owners and eliminating well-known
names in the business.
Smaller contractors have closed, while some larger firms have been gobbled up
by even bigger companies.
Industry watchers say changes haven't lessened the ability to build and maintain
roads and bridges in Iowa, an issue that has come to the forefront since the
Minneapolis bridge collapse this month, but there's concern that continued
consolidation could lead to higher road-building costs in the future.
Consolidation has been going on nationally, said Scott Newhard, vice president
of public affairs for Associated General Contractors of Iowa.
Companies in the industry pave highways and streets, install sewer and
waterlines, and supply materials such as cement, asphalt, sand, gravel and
crushed stone.
In Iowa, two large out-of-state companies have become major players through a
string of purchases in the last six years.
Knife River Corp., a North Dakota-based company with operations in 15 states,
has purchased five Iowa businesses since 2004, including Fred Carlson Co. of
Decorah in 2004.
Oldcastle Iowa Group, part of Washington, D.C.-based Oldcastle Materials with
operations nationwide, has bought a half-dozen Iowa companies since 2001. The
latest purchase came this month when the company announced the purchase of
Cessford Construction Co., based in Le Grand, Ia.
Cessford has operations in southeast Iowa, giving Oldcastle its first locations in
that part of the state.
"We're always looking at the right opportunities," said Jim Gauger, president of
Des Moines-based Oldcastle Iowa Group.
Growth in the industry hasn't been limited to state newcomers.
Purchases dating back to the 1980s helped build Brooklyn, Ia.-based Manatt's
Inc. into one of the state's largest highway construction companies, a company
history on the Manatt's Web site shows.
Roger Bierbaum, director of the Office of Contracts at the Iowa Department of
Transportation, said consolidation hasn't interfered with the ability to construct
and maintain roads and bridges in Iowa.
A major reason: Capacity hasn't been affected.
Much of the consolidation has involved deals that put road building in the hands
of fewer owners, but didn't cut into the number of operations that do the work,
Bierbaum said.
Figures from Iowa Workforce Development show plenty of workers were on the
job this summer building highways, streets, runways, bridges and sidewalks.
The companies employing these workers - 6,946 on the job in July, compared
with 6,682 in July 2000 - are subject to Iowa unemployment insurance
regulations.
The state, however, has fewer highway construction employers, based on
membership figures from Associated General Contractors of Iowa. Membership
in 2006 was down about 17 percent from 1996, said Ricke Welden, the group's
director of field services for the contractors' group.
The reasons for half the drop, according to Welden, was smaller companies just
shutting down. One-fourth was caused by mergers and buyouts, and the final
fourth was for other reasons such as nonpayment of dues.
The association represents about 180 highway, bridge, sewer and waterline
contractors in Iowa.
The U.S. Census Bureau figures show a downward trend nationally, beginning in
2001, said Kelly Strong, Iowa State University associate professor in civil,
construction and environmental engineering.
Companies engaged in a broad category called civil and heavy construction
totaled 46,238 in 2004 nationally, the latest figures available, down 1.6 percent
from 2003, Strong said. Numbers before 2003 couldn't be compared directly
because companies were classified differently.
Companies purchased by Oldcastle still maintain their original names and
operate much as they did when they were independent, usually with the same
management team.
"That's the way we do our business," said Gauger. "Local managers stay with the
company. They know the business They know the people."
Knife River normally changes the name of any company it purchases to Knife
River, but offices remain open and continue to operate with the same products
and services, said Art Thompson, a Knife River spokesman.
Knife River purchased Fred Carlson Co. of Decorah in 2004, and changed the
Carlson name to Knife River earlier this year.
Industry consolidation so far hasn't played a role in raising the prices that Iowa
taxpayers have to pay for road work, but there's concern that further industry
contraction could lead to higher costs, Bierbaum said.
"We like to see competition when we let projects for bid," said Bierbaum. "Our
feeling is the more competition, the better prices you're probably going to
receive." Consolidation normally results in less competition, he added.
About 1,000 companies, mainly in Iowa and border states, expressed interest in
work with the Iowa DOT over the past three years, Bierbaum said. The number is
down about 10 percent from three years ago, he added.
An aging population plays a part in the consolidation. At many family-owned
companies, owners are getting older and no younger family members are
available to run the business, or interested in doing it, Newhard said.
"Kind of small, well-run family businesses - that is our typical acquisition model,"
said Gauger.
Michael Kvach, executive vice president of the Asphalt Paving Association of
Iowa in Ames, said purchases have helped strengthen some companies and
haven't limited competition.
"It's been a healthy trend," Kvach said.
Strong said some large diversified companies are investing in constructionrelated businesses because they believe the field will offer a good return on their
money. For example, Knife River's parent company, MDU Resource Group, also
owns natural gas and electric utilities and production service companies.
Some companies within the industry want to be vertically integrated - owning
operations that cover different stages of the road-building process. A company,
for example, may own rock quarries, cement or asphalt production plants, and
paving operations.
The setup can help with costs of construction materials, which have been rising
faster than inflation, Strong said.
Companies also may want control of supplies of raw materials as natural
resources become scarcer, he said.
Reporter William Ryberg can be reached at (515) 284-8104 or
bryberg@dmreg.com