M&A activity in the utilities & energy infrastructure sector hit €329 billion last year, on the back of continued strong financial investor interest in Europe and consolidation, some mega, in the North American market. New analysis shows that conditions in the wider European market remain in flux as seven key trends affect future M&A activity.
The global utilities and energy infrastructure market is facing a host of challenges as the world moves towards a zero-carbon future. In a new report from A.T. Kearney, titled ‘Mergers and Acquisitions in Utilities 2017’, the firm considers market trends in the industry, as well as seven key factors likely to affect the sector going forward.
M&A deal volume in the utilities and energy infrastructure segment has continued to track down from the recent spike seen in 2011. Deal value, however,increased considerably in 2016, hitting €329 billion, up from the previous years’ €191 billion. The lion’s share of activity in the most recent period occurred in the US, where deal value almost tripled on the year previous. The high value was largely due to a number of mega deals between US and Canadian concerns, with deal volume in the region remaining relatively static on the year previous.
Europe too saw deal volumes remain relatively similar to the year previous, although, like in North and Central America, deal value soared by more than double the previous years’ result. Asia on the other hand saw similar deal volumes but a considerable contraction in value.
The research finds considerable transformation is afoot in the European M&A sector, with utilities and energy investors bowing out to the increased presence of financial investors. The shift in the market has, largely, flipped the respective deal values as % of total deal activity in Europe between the 2009 and 2016 – on similar total deal values.
The reasons for increased financial investor interest in the space are multifaceted. One significant change is the increase in cheap money available in Europe, with persistent low interest rates and significant liquidity in the market. Leveraging low cost capital, private equity and infrastructure funds have entered the market in Europe, in part due to low company valuations in the region.
EDF saw its market capitalisation fall by -85% between 2008 and 2017, while E.ON has seen its market capitalisation fall -78%, and RWE witnessed a -81% drop. The drop in market capitalisation is partly the result of companies spinning off assets and divesting from non-core activity in the face of changing regulatory scheme across the region. Market capitalisations for large companies across North and Central America and Asia have largely seen growth, or modest declines.
While Europe has seen considerable declines in market capitalisation of its major utility companies, as well as increased focus of financial sector involvement in the sector, the future will – according to A.T. Kearney – be defined by seven key trends:
1. Asset stripping due to decreasing portfolio synergies of integrated utilities
Large utilities in Europe find themselves under pressure to divest and spin off more and more of their underperforming or non-core and non-synergistic assets. Increasing the number of targets for financial investors.
2. Divestments triggered by the financial needs of state-owned companies
State owned companies are finding themselves being privatised, sometimes forced – such as in Greece – to pay off state debts. This trend may continue.
3. The first exit wave of financial investors (reaching the end of their investment cycle)
The first wave of assets owned by medium-term financial investors are likely to come onto the market as they seek to exist the transformed or stripped assets.
4. Portfolio shifts of utilities (prompted by de-carbonization and growth in renewables, for example)
Utilities are divesting from certain types of assets to position themselves in the renewables sector, from carbon free generation to technology and advisory capabilities.
5. Financial investors’ strong appetite, driven by continued low-cost capital
Financial investors, leveraging their strong credit ratings and the continued low-cost capital environment in Europe, are well positioned to continue their asset acquisition spree in the segment as targets become available.
6. The geostrategic interest of sovereign wealth funds and state-owned companies
Sovereign wealth funds too are increasingly active in the space, with particularly Asian and Middle East based funds, picking up strategic assets across Europe. Chinese foreign direct investment into the EU has grown to €19.6 billion from €2 billion in 2009.
7. Venture and growth investments in new energy business models
New business models are also affecting the wider utilities market, which may in turn push them to enter into partnerships, or engage in acquisitions, to provide the kinds of services and propositions of the future.